A teaser rate is a method of creative pricing that financial institutions and companies may use as a way to attract customers. Teaser rates are often seen with interest rates, but they may also apply to prices for services.
For loans or credit cards, teaser rates are typically low starting interest rates that last for a set period of time. For investment products like annuities, a teaser rate may be a higher guaranteed rate that lasts for a short period. A teaser rate is a way to “tease” or entice you to obtain a loan, credit, or service. Learn what this means for you, how to identify teaser rates, plus the pros, cons, and alternatives to them.
Definition and Examples of Teaser Rates
Teaser rates are often an interest rate or price used as a marketing tactic to convince you to sign up for a particular product.
Often, a company will offer a low introductory teaser rate to make its product appear cheaper. For example, an annuity provider may offer an initial high interest rate, but that rate may only be guaranteed for a limited period of Ïtime. Lenders may offer teaser rates in hopes you sign up for a loan or line of credit.
- Alternate names: introductory rate, promotional rate
Another example of a teaser rate is a variable interest rate loan that has a low initial rate. After a short, specified period of time, the rate adjusts upward. The speed at which the rate can adjust upward will vary by lender and loan product. The maximum amount the rate can rise will also vary.
Subprime mortgages with teaser rates were common from 2003 to 2007 and were a direct contributing factor to the 2008 financial crisis. The initial fixed teaser rate was generally very low, and the interest rate on the mortgage loans was typically scheduled to increase by as much as 2 percentage points or more once the introductory period ended.
How Teaser Rates Work
Teaser rates often make a product seem attractive. You may be enticed to apply for a mortgage or credit card because of the low initial interest rate. Or you may decide to sign up for internet service with a certain company because it promises a low initial monthly rate.
The initial teaser rate is often only in effect for a very short period of time. After that, the rate can rise and a product or service can become more expensive. For example, a credit card may offer a 0% introductory interest rate on balance transfers and purchases for 18 months. After 18 months, that rate could jump to between 13% and 24%.
In some cases, regulations aim to protect you from being misled by teaser rates. Laws may require lenders to use specific language, such as describing the rate as an introductory or promotional rate. Lenders may also be required to assess your financial credentials to make sure you can afford to pay the loan at the full rate once the teaser rate ends.
Whenever you see a teaser rate, be sure to read the fine print before signing up for a service or product. You’ll want to be prepared to pay more in the future if that’s the case.
Pros and Cons of Teaser Rates
May make a product or service easier to pay
Saves you money
Payments become more expensive after the teaser rate ends
You could be at risk of default if you can’t afford it
- May make a product or service easier to pay: Teaser rates can initially make a product or service, such as a personal loan, easier to pay back since the amount you pay per month is lower.
- Saves you money: Sometimes, you can save money when you have a teaser rate. For example, you could take advantage of a credit card balance transfer offer that drops your interest rate to 0% for several months. You then could use that time to pay off your principal balance without owing interest. Ideally, you could repay your borrowed amount before the teaser rate expires.
- Payments become more expensive after the teaser rate ends: Teaser rates can be risky. Loan payments or utility costs could become much more expensive when the promotional rate ends.
- You could be at risk of default if you can’t afford it: If you weren't aware of how high the rate could go and you budget for the higher payments, you could be at risk of defaulting on the debt or not being able to pay your bills.
Alternatives to Teaser Rates
A fixed rate is one alternative to a teaser rate. With a fixed interest rate on a loan, for example, the interest rate and monthly payment of the loan remain the same for the entire period of time the borrower has the loan. There are no surprises, and there’s no initial low interest rate that makes the loan seem more affordable than it ends up being.
If you are being offered a low teaser rate by a utility company, such as a cable company or internet service provider, be sure to ask how much your payment will be once the teaser period is over. If the payment is higher than you’ll be comfortable with, see if you can negotiate a rate that works for your budget. Emphasize your need for the rate to stay the same beyond the teaser rate period for budgeting purposes. If you’re able to get a rate you’re comfortable with, be sure to get it in writing. If not, shop around to see what other companies offer.
- Teaser rates are attractive starting rates that financial institutions or companies use to attract customers.
- Teaser rates are common on credit cards and loan products, but can also be offered on investment products, such as annuities. In this case, an initial high rate is offered only for a limited time.
- Teaser rates last for a limited period of time and may initially make a loan or service seem more affordable.
- After the teaser rate expires, payments could become much higher, so be sure to ask what they’ll be once the introductory period is up.
- Read the fine print before signing up for any product or service with a teaser rate.