Why is the offering of "teaser loans" by commercial banks a cause Of economic concern ?1. The teaser loans are considered to be an aspect of sub-prime lending and banks may be exposed tothe risk of defaulters in future.2. In India, the teaser loans are mostly 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
Answers
Correct option is a) 1 only
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A Teaser loan refers to a loan which is provided for a fixed period and could then be withdrawn. It comes with a lower rate of interest during the initial years and then start charging normal interest rates.
These loans are usually targeted at low-income home buyers ,they are considered an aspect of sub-prime lending. These home buyers would initially pay the loan installments for few years but eventually default in case of an economy downturn which might bring about jobs disruption and their earning capacities . This ultimately may lead to a scary situation for the entire banking system .
Option 1 is correct.
T
. Unfortunately, when these borrowers try to refinance the loan before the rate increases, most will not qualify for standard mortgages. This leaves borrowers with increased monthly payments, which many cannot afford. This method of loaning is considered risky, as default rates are high
Option 1 is correct.