Question

Why is the offering of “teaser loans” by commercial banks a cause of economic concern?
1. 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. 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

Hint:

Teaser loans are home loans with a low starting rate that later resets higher, not business loans.

Answer 1

The Correct Option is A

Teaser loan questions turn on remembering what kind of loan a "teaser loan" is: a home loan with a low starter rate, not a business loan.

1. Statement 1: The concern with teaser loans is that the low initial EMI can lure borrowers who cannot really afford the loan once the rate resets higher, which is exactly the sub-prime-style risk regulators worried about. This statement is accurate.
2. Statement 2: This describes a business or project loan to entrepreneurs, which is not what a teaser loan is. Teaser loans are retail home loans, so this statement is incorrect.

Only statement 1 correctly explains the concern.

So the correct answer is option A, 1 only.