Question

Why is the offering of “teaser loans” by commercial banks a cause of economic concern?
1. Teaser loans are considered to be an aspect of sub-prime lending, and banks may be exposed to the risk of defaulters in future.
2. Teaser loans are given to inexperienced entrepreneurs to set up manufacturing or export units.
Which of the statements given above is/are correct?

• A. 1 only
• B. 2 only
• C. Both 1 and 2
• D. Neither 1 nor 2

Hint:

Teaser loans are home loans with a low starting rate that later resets higher, not business loans.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept.
Teaser loans are home loans that start with a low, fixed “teaser” interest rate for the first few years, after which the rate resets to a higher floating rate.

Step 2: Check statement 1.
Because the low initial rate can tempt borrowers who may not be able to afford the higher rate later, teaser loans are seen as a form of easy or sub-prime lending, raising the risk that borrowers default once the rate resets. This is exactly the concern raised by regulators, so statement 1 is true.

Step 3: Check statement 2.
Teaser loans are a home-loan (mortgage) product for individual borrowers, not a business loan for entrepreneurs setting up manufacturing or export units, so statement 2 is false.

Step 4: Final Answer.
Only statement 1 is correct.