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.