What it means
Lenders advertise teaser rates to win business in a crowded market. A credit card might offer a very low rate for the first six months, or a mortgage might fix a cheap rate for two years before moving to a variable rate.
The rate is not a trick, but it is only part of the story. After the introductory period ends, the borrower pays the standard rate, which is often much higher, and which may apply to the whole remaining balance.
Teaser rates are common in adjustable-rate mortgages, balance-transfer cards and introductory business loans. In each case the lender hopes the customer will stay on after the reset, either because switching is inconvenient or because the borrower does not notice the change.
Comparing offers requires looking beyond the headline. The annual percentage rate (APR), which combines interest and certain fees into one yearly cost, helps, but a borrower should also look at the reset rate, the length of the teaser, any fees for transferring a balance and what happens if a payment is late.
Some cards cancel the low rate after a single missed payment. For businesses, teaser rates can be a cheap source of short-term funding if used carefully.
The key is to have a clear plan to repay or move the balance before the period ends, and to avoid building spending habits that depend on cheap credit. Teaser rates are regulated in many countries, with rules requiring clear disclosure of the period and the rate that follows.
Even so, the burden remains on the borrower to read the terms.
In practice
Real-world examples.
Example
A homeowner takes a mortgage with a 2.9% rate for the first two years. She knows the rate will then float with the market, so she saves part of her monthly saving to cushion the reset. She also sets a reminder for the month before the reset so that she can shop for a better rate.
Example
A freelance consultant transfers a $10,000 card balance to a new card with a low rate for nine months. He sets up automatic payments of $1,111 a month so the balance is cleared before the standard rate starts. He avoids using the card for new purchases, because new spending may be charged at the higher rate.
Example
A construction firm obtains a short-term loan at a low teaser rate for the first quarter of a project. The finance director models cash flow at the reset rate so the firm is not surprised later. The firm also checks whether the loan carries an early-repayment fee before accepting.
Formula
Calculation
Interest saved during teaser period = Balance x (Standard rate - Teaser rate) x (Months / 12)
A customer moves a $20,000 balance to a card with a teaser rate of 2% for six months, compared with a standard rate of 18%. The saving is $20,000 x (0.18 - 0.02) x (6 / 12) = $20,000 x 0.16 x 0.5 = $1,600. If $20,000 is still owed when the teaser ends, interest then accrues at 18%, which is $20,000 x 0.18 / 12 = $300 a month.Case study
Seen in the real world.
Blue Harbour Studios is an illustrative, fictional design agency that moved $30,000 of equipment debt to a card offering 0% for ten months and a 20% rate afterwards. Its manager, Chloe, set a monthly repayment of $3,000 to clear the balance in time.
In months six to eight a large client paid late and Chloe could pay only $1,000 a month. The balance fell more slowly than planned and about $6,000 remained when the teaser ended.
In this fictional story, the remaining balance then began to cost 20% a year, or about $100 a month. Chloe learned to build a buffer into her repayment plan so that one late payment does not push the balance past the end of the teaser period. Chloe now treats every introductory rate as a short bridge, not a lasting saving. She also keeps a spreadsheet of each offer's end date, the standard rate and the fee for moving a balance, so decisions are made with the full picture in front of her.
Watch out
Common mistakes.
- Treating the teaser rate as the long-term cost of borrowing.
- Missing a payment and losing the teaser rate, which many contracts allow the lender to withdraw.
- Ignoring transfer fees, which can cancel out much of the interest saving.
Questions
People also ask.
How long does a teaser rate last?
Periods range from a few months to several years depending on the product, and the exact length is set out in the loan terms.
What rate applies after the teaser ends?
A standard or variable rate set in the contract, often much higher than the introductory one.
Does the APR show the teaser rate?
The APR rules vary by country, so you should look at the separate disclosure of the introductory and the standard rate rather than rely on one number.
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