Teaser Rates

Despite regulatory discomfort, teaser rates are back.
Teaser rates have a fixed lower initial interest rate for a specified period, followed by a floating rate. As and when interest rates begin to rise, the floating rate is expected to go up.

Teaser rates had been introduced in the home loan segment but have now spread to other forms of consumer financing. 

Teaser rates are marketing gimmick to lure the customers towards loan products.

The default rate in this category is also quite high. We are forced to introduce teaser rates because of the competition.

Teaser rates were introduced by banks last year to boost demand for housing finance in a slowing economy. The first off the block was the public sector State Bank of India (SBI) with its Easy Home Loan. SBI's rate was 8% for the first year and 8.5% for the next two years. After three years, the terms are highly confusing. After three years, rate of interest depends on whether customer has chosen fixed lending rate or floating lending rate. Floating rates move with the market. and Now these rates are back.

Teaser home loan rates, which entice borrowers with a low fixed rate initially and then move to a floating rate, are a matter regulatory concern and may impact financial stability of the lenders. Borrowers with low financial means may get attracted to take such loans on finding the initial low interest rates to be within their financial means, but may land themselves into a financial distress once interest rates start rising and the banks start charging them with higher interest rates post the lapse of the initial period.

RBI wants to wind up these rates.

Apart from the above: 

This is also the one of reasons for Sub prime crisis as these loans were formulated to lure sub prime customers. It was a kind of predatory lending where people lied on the applications to become eligible for the loan. 

THE ADJUSTABLE-RATE FIASCO