Question

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 to the risk of defaulters in future.
2. The teaser loans are 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

Answer 1

The Correct Option is A

Teaser loans, as offered by commercial banks, are initially attractive because of lower interest rates, but they can reset to much higher rates after a specified period. This can lead to repayment challenges for borrowers, increasing the risk of default. With respect to the statements given:

1. The first statement is correct. Teaser loans resemble sub-prime lending, where individuals initially receive loans at attractive terms but may face higher payments as interest rates reset. This sets up a scenario where banks could face significant defaults, akin to the sub-prime mortgage crisis. 
2. The second statement is incorrect. Teaser loans are generally not linked to loans for inexperienced entrepreneurs setting up businesses. They mainly involve consumer lending, such as home or personal loans, rather than commercial undertakings.

Therefore, the correct answer is: 1 only.