Understanding Teaser Rates: The Good, The Bad, and The Jargon
When you apply for a new credit card, mortgage, or loan, you might encounter the term “teaser rate” — a temporary, low interest rate offered to attract new borrowers. Typically, this introductory rate lasts only a few months to a couple of years before rising to a higher, standard rate.
What Exactly is a Teaser Rate?
A teaser rate is an initial promotional interest rate that is significantly lower than the lender’s standard rate. It is intended as an incentive to attract new customers in a competitive financial market. This rate can apply to purchases, balance transfers, or the entire loan amount depending on the credit product.
How Does a Teaser Rate Work?
- The Offer: The lender advertises a low introductory Annual Percentage Rate (APR), often 0% or a very low percentage, for a fixed period (e.g., 6, 12, or 18 months).
- Application and Approval: You apply for and get approved for the loan or credit card.
- Introductory Period: During this time, interest on applicable balances is charged at the low teaser rate.
- Rate Increase: After the intro period expires, the APR jumps to the lender’s standard rate, typically tied to a benchmark like the Prime Rate plus a margin based on your creditworthiness.
- Terms and Conditions: The detailed contract specifies how long the introductory period lasts and what the standard rate will be afterward.
Example:
If a credit card offers 0% intro APR on purchases for 15 months and you buy a $1,000 appliance, you pay no interest during those 15 months. If the balance is not fully paid off by then, the remaining amount accrues interest at the normal APR, often 18% or higher.
Why Do Lenders Offer Teaser Rates?
Lenders use teaser rates mainly to:
- Attract new customers in a competitive market.
- Grow their customer base and increase market share.
- Encourage use of their financial product.
- Eventually profit from higher standard rates after the introductory period.
Common Products With Teaser Rates
- Credit cards (most common, for purchases and balance transfers)
- Adjustable-rate mortgages (ARMs) with initial low fixed rates
- Some auto loans and personal loan promotions
Advantages of Teaser Rates
- Save money on interest if you can pay off balances before the rate increases.
- Useful for consolidating higher-interest debt through balance transfers.
- Can make large purchases more affordable with interest-free financing during the intro period.
Risks and Disadvantages
- The post-introductory interest rate often jumps sharply, leading to high costs if balances remain.
- Fees such as annual or balance transfer fees may reduce or eliminate savings.
- Minimum payments during or after the teaser period might keep balances accruing costly interest over time.
- Can tempt overspending by creating a false sense of affordable credit.
Tips for Using Teaser Rates Wisely
- Read and understand the full terms and fees before applying.
- Develop a realistic payoff plan to clear your balance before the teaser rate expires.
- Set reminders to know when the introductory period ends.
- Avoid making new purchases after the intro period, especially on cards with high standard APRs.
- Compare multiple offers to find the best terms.
Real-World Example
Sarah transferred $5,000 of credit card debt at 18% APR to a new card offering 0% teaser rate for 12 months but charged a 3% transfer fee ($150). Paying off the full balance within the year saved her over $700 in interest compared to her previous debt.
Frequently Asked Questions
What happens if I miss a payment during the teaser period?
Missing a payment can void the teaser rate and trigger the immediate application of the higher standard APR.
Can I transfer a balance from one 0% APR card to another?
Yes, but watch for transfer fees and confirm the new card’s teaser rate details.
Are teaser rates common in mortgages?
Yes, especially with adjustable-rate mortgages that start with lower fixed rates for a set period.
How to identify a teaser rate?
Look for terms like “introductory rate,” “promotional rate,” and specified timeframes for a low APR.
Conclusion
Teaser rates can provide valuable interest savings and financing flexibility if approached carefully. Always read the fine print, plan your payments, and stay aware of when the rate changes to avoid unexpected, costly interest charges.
External References
- For more on credit card features including teaser rates, visit Consumer Financial Protection Bureau.