What Is a Teaser Loan?

Teaser Loans Explained in Less Than 5 Minutes

Definition
Teaser loans are loans with an appealing trait such as a low interest rate to “tease” borrowers into taking it. The goal of these loans is to offer a teaser rate to appeal to you enough with the initial offer that you lock in the higher rates later on in the loan.
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Teaser loans are loans with an appealing trait such as a low interest rate to “tease” borrowers into taking it. The goal of these loans is to offer a teaser rate to appeal to you enough with the initial offer that you lock in the higher rates later on in the loan.

While teaser loans do sometimes meet a need, it’s important to understand the complete package of what you’re choosing when you opt for a teaser loan before you decide it is right for you.

Definition and Examples of Teaser Loan

A teaser loan is a credit or loan product that begins with a better rate or fee structure for a certain period of time. The concept is that people will focus on this promotional period of low interest—adjustable-rate mortgages, for example—or free balance transfers on a credit card, and then either ignore or downplay the higher rates later on in the loan.

Note

Teaser loans grew in popularity during the height of subprime mortgage lending in the early 2000s.

While there’s no one-to-one correlation between teaser loans and housing defaults, products that focus on a promotional period offer sometimes have much less attractive terms a few years in, making it harder to make payments consistently and on time.

For example, a teaser loan might be advertised in an email marketing campaign as having a 2% interest rate for a promotional period of 6 months. It might also explain that the loan product is actually an adjustable-rate mortgage (ARM), through which you receive the ultra-low rate for only a short time, and then your APR adjusts. 

The lender’s goal is to wow you with the initial offer, even though the majority of the 30-year term will be paid at a higher rate. You’ll need to talk carefully with your lender to make sure you understand what your payment structure could be at each point in the loan.

How a Teaser Loan Works

Teaser loans take advantage of an aspect of human psychology, wherein something impressive (like a very low interest rate) is given too much weight in our minds, while the fine print about later interest rates is disregarded. The fact that teaser loans still have long terms despite the short duration of the teaser rate would make them less attractive to most people if they were evaluating all the factors.

Heavily marketing the teaser loan’s introductory offer isn’t illegal. Still, the lender needs to clearly state “all applicable rates or payments with equal prominence and in close proximity to any advertised promotional or ‘teaser’ rate or payment,” according to lending-focused Regulation Z.

Note

When you’re applying for a teaser loan in person, the lender may not put much emphasis on potential long-term interest rates of the loan if you don’t ask in-depth questions.

Many people think that they will take advantage of a teaser-based loan product in a way that the company doesn’t expect. For instance, some people who qualify for credit cards or loans with teaser rates assume they’ll be able to pay back their entire balance before the promo period ends. While this can sometimes work to the advantage of the credit card holder, that won’t always be the case. It can be easy to be too optimistic about how aggressively you’ll be able to pay down debt, so take that possibility into account.

Are Teaser Loans Worth It?

A teaser loan or credit card offer is worthwhile if you aren’t surprised by the results when the special promotion expires or if you can pay off the balance before the promotion deadline.

A good example of when a teaser loan could help you is an adjustable-rate mortgage in which the introductory interest rate is very low during a time of low cash flow in your life. Perhaps you’ve had a child, bought new furniture, or are getting established at a new workplace. If you have strong reasons to believe that you’ll be able to afford the higher interest rate later on in the mortgage, these loans may help you get into a home sooner. You just have to evaluate the whole picture to avoid any payment shock.

In the context of a store credit card, a teaser rate could be worth it if you can pay off the balance before your deferred-interest promotional offer ends.

Key Takeaways

  • A teaser loan is any loan product that advertises an impressive interest rate or other enticing deals to make customers interested in a loan that will have a higher interest rate later on.
  • One form of teaser loan is an adjustable-rate mortgage (ARM) with a particularly low promotional rate at the start of the loan.
  • Teaser loans must be explored in their full context to determine if their rates are truly a good deal for your circumstances.
  • Evaluating all the terms of a loan can be complex, but asking questions about how long a promotional rate lasts should be a key part of your conversation with the lender.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. American Predatory Lending. "Business Analysis: Evolution of Subprime Mortgage Products." Accessed Dec. 8, 2021.

  2. Federal Deposit Insurance Corporation. “2008 Amendments to Regulation Z (Truth in Lending & Home Ownership and Equity Protection) and 2008 Conforming Amendments to Regulation C (Home Mortgage Disclosure).” Accessed Dec. 8, 2021.

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