Who benefits from teaser loans? Who is hurt by them?

Both lenders and borrowers can benefit from teaser loans if the borrower repays the loan before the interest rate goes up. Borrowers are likely to be hurt by teaser loans if they aren't able to repay the loan before the rate goes up. Lenders can also be hurt in this scenario, because if many borrowers can't repay their loans, the lender may not be able to break even.

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The term “teaser loan” is an informal designation for an adjustable-rate loan. It is commonly used for credit cards and mortgages. The lender offers a loan with a low initial annual percentage rate (APR), which will increase by designated amounts and at fixed intervals during the period of the loan. This type of loan can benefit the borrower if they are reasonably certain that they will be able to repay the loan, either in its entirety or a large percentage, before the rate increases. The disadvantage is that if the borrower does not repay it, the total amount due will be substantially increased because of the higher interest rate.

In the first scenario, the borrower will benefit because they will have the use of the borrowed sum for a low rate. The lender will likely benefit, as in the case of credit cards, by attracting many new customers. The lender will probably not be hurt, because the APRs are based on the estimated number of borrowers who will repay at different times. In the second scenario, the borrower will be hurt because their costs will be much higher. The lender benefits because their income increases. However, when this type of loan is used for mortgages, the borrower may not be able to make the higher payments, and the lender may foreclose on the mortgage. Not only will the borrower lose their house but, if this result occurs in a large number of cases, the lender may not recoup its expenses.

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