How profitable are teaser loans to lenders?

Teaser loans can be quite profitable to lenders, because people often continue to utilize the loans after the introductory period of low interest.

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When considering how profitable "teaser loans" may be for lenders, the short answer is that they can be very profitable, but only in certain conditions. This means that, in one sense, teaser loans are something of a gamble for lenders. High profitability is not guaranteed, but it happens frequently enough for many to think these loans worth the trouble.

A teaser loan is just a loan of any sort that has some kind of attractive "introductory offer"—most often a lower interest rate, sometimes even 0%, as an incentive to sign people up. A credit card that has an introductory interest rate far below market norms is a good example. People are attracted to them because, if they use them properly, they can save a fair amount of interest in the short run.

The profit for the lender and the possible problem for the borrower comes when the introductory period expires. It is common that at this point the interest rate becomes fixed to something standard. It's not necessarily outrageous, but if the borrower is not paying attention, the introduction of interest can go unnoticed—and thus the profitable part of the relationship for the lender begins.

As a strategy, teaser loans work because people are drawn to savings and introductory offers. It is easy to convince yourself at that moment that you simply stop using the loan or the credit card when the interest goes up. The problem is that by that time, people have generally acclimatized to paying the bill and not really paying attention. A small amount of interest is likely to be shrugged off by someone who is already used to using the card, when it is tacked on to one bill. However, over time, that interest that the borrower has become used to paying without thinking much about it is pure profit over the long term for the lender.

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