What is a teaser loan? A teaser loan is a loan that offers low interest rates during the first two years of the loan tenure. Here the interest rates are artificially kept low in the initial few years to attract the borrowers. The borrowers get tempted to avail the teaser loan as in the initial years the EMI is comparatively low. Thereafter the interest rate soars. It is also known as ‘2/28’.
For example: A loan starts off with an interest rate of 9% for the first two years. Third year onward, the interest rate rises to 11.5%. Thereafter, the interest rate fluctuates based on the Prime Lending Rate.
The teaser loan is a risky product as the borrowers tend to default when the interest rates jump.
It is available only for floating/adjustable/variable rate loans.
The prepayment penalty is relatively high.
July 17th, 2008 at 3:27 pm
Hi i am just not sure wht these loans are, personal or home or smthng else. There is a repayment option known as step up EMI thats banks offer. the EMI is lower in the initial years and higher thereafter. I am thinking that that is wht you are referring to? Are you? But all the same, its a real nice piece.
July 26th, 2008 at 11:59 pm
Thanks to your article that I know now such a thing exists! Two questions though…
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1] why ‘2/28′?
2] when should one go for such loans? (except, of course, if one’s planning to default
August 5th, 2008 at 8:09 pm
There are loan options available that offer an individual stepped EMI payment (ex 5-5-5) for a 15 yr loan. There are generally 2 steps or maybe even more.The concept of such loans is simple. The EMI in the initial years (first 5 yrs)is low, and increases during the second and third step. Looking at the positive side, in a market where your loan eligibility is based on your repayment capacity, the above are ideal if u want to avail a higher loan to buy your dream house. Also, the fact that an individuals salary increases over the years and therefore he has a higher future payment capacity than today. Sounds logical aah!. Also, if you have taken such a loan with initial least EMI (Whatever the bank permits) and for longest first duration the bank permits, you would be actually paying less out of your pocket in the initial yeras, if the idea was to sell the flat and book some profit before completion of the first step.
October 13th, 2008 at 3:20 pm
Hey bhakti it was a good write-up..however can you tell me if the banks offer these loans and if they do what are they called? and why would someone take such loans?
Does the banks who extends these types of loans informed customers about the increasing interest rates?
December 17th, 2008 at 5:36 pm
Interesting concept however i need to know what’s 2/28?
December 17th, 2008 at 5:39 pm
I wonder why people would default? Aren’t they informed that the loan interest rates are low and would keep increasing?