How to Take Advantage of Teaser Rates |
By David Pilley on November 9, 2010
.jpg.aspx?width=75&height=75) If you are getting any type of loan, you are probably well aware that you will be paying back more than the principal amount. Interest rates may vary for different loans, so if you’re looking to save a bit of money, you need to shop around. One of the gimmicks lenders use to get you to purchase their loan is a teaser rate.
A teaser rate is also known as an introductory rate because it is the beginning interest rate on your loan. It will be less than the prime rate, a benchmark used by banks to come up with a general interest rate for loans not assigned a fixed rate. Your new mortgage loan or credit card might have an introductory rate at about one or two percent, and many lenders might even start you with a zero percent rate. A loan with no interest? I don’t know who wouldn’t like that, but it’s too good to be true.
Now, I’m not saying don’t get a loan with a teaser rate of 0%. In fact, this type of loan may help you save some money in the short run, so don’t hesitate to get one if that’s what you’re looking for. As long as you make your monthly payments back on time, the rate will remain at zero percent for the allotted amount of time.
But what goes up must come down. Your introductory rate is only temporary. The interest rate will typically stay at the introductory amount for six months, and then it will gradually go up. It might jump up a few different times in the next few months, and before you know it, your interest rate will be at or even above the prime rate.
This type of changing interest rate can also be seen in an ARM (adjustable-rate mortgage). If you get this type of loan for a home, you will start off at one to two percent below the prime rate, and the interest rate will go up to the prime rate when the adjustment period ends. This amount of time may last a few years, so this type of mortgage loan could benefit you if you think your financial situation will improve in the near future.
Once the teaser rate expires, it is gone forever. While saving money is a positive of a teaser rate, it is for a short period of time. If you’re going to live in your home for the full 30 years or you’re going to use the credit card for a long time, you must be prepared to make higher payments once the tease is over.
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