An introductory rate (also known as a teaser rate) is an
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is disti ...
rate charged to a customer during the initial stages of a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
. The rate, which can be as low as 0%, is not permanent and after it expires a normal or higher than normal rate will apply.
The purpose of the introductory rate is to market the loan to customers and to seem attractive. They are commonly used for the application of
balance transfers, and they may or may not apply to
cash advances.
In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territo ...
, the
Fair Credit and Charge Card Disclosure Act (FCCCDA) requires that the rate that will occur following the expiration of the introductory rate be clearly disclosed to the customer.
When determining qualification for a loan
Sometimes, due to an introductory rate, an applicant can get approved for a
mortgage based on payment history, when that applicant may have had a good payment history on the introductory rate, but may not be able to maintain such payments once this rate expires and rises.
Teaser rate
A teaser rate is a low, adjustable introductory interest rate advertised for a loan, credit card, or
deposit account
A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.
...
in order to attract potential customers to obtain the service. The teaser rates are normally too good to be true for the long term, and are far below the common realistic rate for the service. In a competitive market, many companies will compete with each other for the lower teaser rate. Typically, the teaser rate is 0%.
The teaser rate is only temporary. After its expiration, the rate increases to a normal or much higher than normal rate, and in some cases, the borrower cannot keep up with making payments.
Some consumers with good credit manage to take advantage of teaser rates by applying for a card, having their balances transferred to that card, and then maintaining payments on that card during the period of the teaser rate. Prior to its expiration, they obtain another card that they use for the same. They continue this technique continually in an attempt to keep money borrowed at low interest rates. Many credit card issuers who catch onto a consumer using this technique will be reluctant to offer the teaser rate to such consumers.
Personal Finance By E. Thomas Garman, Raymond Forgue, page 187
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See also
*Adjustable-rate mortgage
A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
* Trojan horse (business)
* US mortgage terminology
References
{{DEFAULTSORT:Introductory rate
Loans
Marketing techniques
Banking terms
Credit card terminology