An insight into ‘teaser loans’

Switching your loan from one bank to another bank is not free
An insight into ‘teaser loans’
"The businesses cannot afford to offend customers and have to offer products and services which give the best value for their money."dtnext.in/ [Creative Commons]

A recent survey by Bain & Company based on its proprietary tool, Net Promoter Score Prism, which tracks changing customer experiences, has found bank customers willing to switch if they were being offered a competitive product or service by another bank, which includes fintech players, neo banks amongst others.

The data collected in the survey was released just two weeks back which reveals that 50 per cent of the customers are willing to switch banks in the next 12 months.

We cannot deny the fact that banks have been facing a big challenge in retaining customers. All of us are well acquainted with an age-old and most commonly known business mantra - “Customer is King”. Traditionally the mantra means ‘providing of good customer service’.

But in today’s environment where technology has swept (and is sweeping) the business operations, it means more than just good customer service.

The businesses cannot afford to offend customers and have to offer products and services which give the best value for their money.

Otherwise, they will turn back and cause serious loss to the companies that fail to delight their customers.

As far as banks in the given competitive environment are concerned, there is no scope to compromise on customer service. On one hand, the emergence of fintech players, neo banks, digital banks etc. in the financial system has compounded the challenge for banks not only to retain the existing customers but also to win new customers.

On the other hand, the growing landscape of advanced technology has fueled tremendous power to customers. Gone are the days when banks used to treat their relationship with customers as transactional. Now it’s most important for them to have a long term relationship with their customers in a sustained manner.

It is an era where customized financial products and services on the digital platform can only hook customers to stay with a bank for a longer period. Some time back, a global survey conducted by Ernst & Young found 44 per cent of global customers feeling put off by the banks.

The confidence level of people towards the banking sector all over the world seems to be dwindling day by day. So, the only way out of this customer attrition crisis for the banks is to rebuild customer confidence.

There’s still time to shape up. The average customer may remain loyal if the services are offered with a personal touch. Banks that offer innovative and personalised customer-focussed services at efficient processes will succeed in the future, reads the survey report.

Meanwhile, the kind of choices available in the market to shop financial products at convenience and with personalized touch have put a lot of pressure on banks to drive loyalty in the long term. It’s where ‘switching services’ originated.

What is ‘switching’?

This is the mechanism where customers transfer their bank accounts from bank to bank to earn more interest on their deposits or get rebate in interest on loans. Normally, ‘switching’ takes place in the loan segment. Any loan, be it a car loan, an education loan, a home loan or a personal loan, can be transferred from one bank to another.

Borrowers using switching routes are not bad, but there are certain riders which need to be evaluated before taking a flight on the route. For example, a borrower can take a commanding position and ask his/her existing bank for repricing options, before actually switching his loan to another bank.

The decision to switch has to be based on more factors than just interest rate. It’s not free. As a borrower intending to avail switching service, you should first ask your current bank whether you will incur a fee for terminating your existing loan or you can convert the loan to one which is more attractively priced. Check if any fees will be imposed on such conversion. Before switching to the new bank whose refinancing package you are considering, check how you will be better off with the refinanced package.

One should note that the installment amounts and interest payments will change once there are changes to the loan package. Also, compare the present repayment schedule for your current loan package with that of the new loan package you are considering and check the total amount of interest payable and other charges.

After calculating the net impact, if you find the cost of switching higher than your savings after the transfer, then the switch does not make sense. It also needs to be taken into account that transfer costs are to be paid immediately, whereas your savings after the transfer will come to you over the years.

Technically speaking, loans with low outstanding amounts and a few years of repayment remaining are not ideal for switching. The costs involved would be higher than the expected benefits.

What is a ‘teaser offer’?

‘Teaser offer’ is an introductory interest rate (lower than the normal rate) charged to a borrower during the initial stages of a loan. This rate is not permanent and takes a flight after it expires. The borrower is charged an actual interest rate and most of the times higher than the normal rate.

It is most important to understand the ‘teaser offer’ meticulously before availing it. Check why the bank, where you want to switch your loan is offering a lower interest.

Don’t rush into any hasty decision. Remember, the banks are locked into a stiff competition. Their profitability over the years has witnessed erosion. The only way to restore their profitability is through the business of loans.

So, why would one want to give you loans at a lower interest rate and lose profits when others in the market are earning a higher rate of interest?

What are teaser loans?

Teaser loans are basically used to lure customers into a financial product or service, be it a personal loan, car loan or home loan. In other words, these kinds of loans are used to entice borrowers having a teaser rate of interest.

Teaser loans are a popular promotional product for loan issuers that tend to entice a broad array of borrowers. For instance, if you opt for a vehicle loan for a period of 7 years at an interest rate of 8%, the bank may offer you a teaser loan for which you would need to pay only 6% interest in the initial two years.

In the third year, your interest rate will switch to 8%. Credit cards with zero or low fees also figure in some of the common teaser loans in the market. Here it is important for the customer to be aware of the rate of interest that will apply after the teaser rate expires.

What are the things to keep in mind before opting for a teaser loan?

Even as teaser loans with low-interest rates help borrowers to save considerable amounts of money on interest costs, they must know the rates that will apply after the teaser rate expires. They need to clearly understand the terms and conditions, especially the repayment schedule, before availing a teaser loan facility.

Notably, in the home loan segment, the teaser loan offers have been withdrawn in India, after the Reserve Bank of India’s (RBI’s) directive, to link all home loans with an external benchmark lending rate (repo rate). This has kept the banks from offering such teaser loans in the home loan segment in the country.

However, in the car loan segment we saw some of the big car makers joining hands with banking institutions, to offer teaser car loans to boost car sales amid the COVID-19 pandemic.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK

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