What Is A Teaser Rate?

What Is A Teaser Rate?

The world of finance can be a really confusing place, and it’s becoming more and more clear that a lot of the language used by banks, traders, brokers and marketers are all used as a restrictive code with the goal of making people confused and intimidated by the financial world, so much so that they naturally seek assistance from experts who can do all of the heavy lifting for them and help them understand the various intricacies of financial language and financial tools

While it’s true that there are elements of the financial world which certainly are confusing, much of this intimidation people feel towards their finances and taking control of them is something that businesses prey upon to get people to make poor financial decisions or ignore their finances altogether to avoid the stress and anxiety they can bring on.

What is a Teaser Rate?

Unfortunately however, the only way to truly rid yourself of the anxiety surrounding finances is to better understand how they work!

In this guide we’re going to endeavor to explain what teaser rates are, how they function, and what impact this is likely to have on your finances, so that you can make a better decision about whether or not to take advantage of the next amazing opportunity that you’re offered, or whether it looks a little too good to be true.

For those of you in a rush, we’ll explain in simple terms what they are right away. Teaser rates are essentially introductory rates charged on certain credit products, designed to entice new customers to take advantage of the eye catching deal being offered by the lender.

For example, a credit card company or lender may offer borrowers a card with an introductory rate of 0% interest, which of course looks very appealing and helps garner a lot of interest for landers and helps to entice people into using credit, even if they aren’t sure they really want to or need to.

There are also other financial products such as adjustable rate mortgages (ARMs) which are designed to charge low initial interest rates to tempt borrowers into taking on a new mortgage, and are one of the main tools used by lenders to encourage people to buy adjustable rate mortgages instead of more traditional fixed rate mortgages.

Naturally, adjustable rate mortgages look great at first glance but can often skyrocket in cost, and some bad adjustable rate mortgages can be more expensive in the long run than slightly more expensive traditional fixed rate mortgages.

The overreliance on adjustable rate mortgages and the huge overborrowing of the late 2000’s was what caused the housing market crash and the global economic recession which ruined so many lives.

The Key Points

– Teaser rates are normally considered to be introductory rates charged on credit, and are often very tempting or provide good value if used properly.

– Credit cards, loans and adjustable rate mortgages all offer low initial interest rates a.k.a teaser rates, which help to draw the attention of prospective lenders.

– Various lenders use teaser rates in various product prequalification marketing to create a tempting offer for new lenders.

How It Works

Teaser rates are actually quite simple, and in essence are simply a way for lenders to market to new customers and create new, appealing deals and accounts to draw credit customers.

As mentioned, the two most popular products that use this tool are credit cards and adjustable rate mortgages (ARMs) however some other financial products use this tactic to draw customers.

Generally, teaser rates offer a startlingly low interest rate for a short period at the beginning of a credit product, and after a fixed and predetermined amount of time, the teaser rate will expire, meaning that a much more expensive rate will replace it depending on the type of product being offered and some other variable factors.

Generally, once the teaser rate expires, the uptick in interest rate is often very high and can give lenders a pretty big shock when they realise how much interest they are being charged.

Ensuring that customers are well informed about how teaser rates work is one of the best ways to avoid lenders getting blindsided by sudden high interest rates and becoming overwhelmed by debt.

Types Of Teaser Rates

Adjustable Rate Mortgages (ARMs)

Using teaser rates for ARMs is very common because of how these products are structured. These mortgages allow borrowers to pay various amounts and rates throughout the duration of their loan, and often the first few years will offer the fixed and very desirable teaser rate, after which variable interest rates kick in.

Lenders are able to organise their interest payments in a few ways with these types of mortgages, and could include a teaser rate that starts as an introductory rate or as the minimum payment amount of the mortgage.

Typical ARM products may not use the teaser for the whole of the fixed interest period of the loan, while others may offer the introductory rate for much longer.

These can sometimes last just months but can sometimes last up to a year, although it’s not common for the introductory rate to be offered for such a long period even during the fixed interest stage of the mortgage.

There are various other options available to lenders in terms of structuring too, from using various rate cap structures to allow borrowers some flexibility in how they pay off their loan.

Credit Cards

Credit cards are very common users of the teaser rate and often market products as 0% interest to draw interest and custom. These rates are relatively simple compared to how ARMs use teaser rates.

For credit cards, the borrower may be offered 0% interest for a specified period, a common option being 12 or 18 months. When the teaser rate expires, the borrower is charged a standard credit card interest rate that will have been agreed to as part of the initial loan deal.

The beauty of these products is that if you pay off the loan before the 0% teaser rate expires, you have technically borrowed money and not been charged anything to do so.

When used diligently and with care this is a great strategy for managing your finances and exposing yourself to as little risk as possible while also building your credit score.

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