Thus, suppose if the borrower has the floating component of loan going on and there is a sudden hike in interest rates, he can then opt for the fixed component and keep the floating component on a halt. The reverse is also possible (fixed to floating). In either cases conversion charges or pre closure penalty needs to be paid.
Teaser loans are also hybrid loans!
Teaser loans had created quite a sensation in the recent past. The largest lender of the country, State Bank of India was the first to come up with this loan scheme. The loan attracted low interest of fixed category for upto 3 years following which the interest converted to the floating component depending on the prevailing interest rates in the market then.
However the borrower has to be careful while choosing hybrid loans.
Points to be noted:
Complete transparency should be sought by the borrower from the part of the lender while taking the loan. Usually lenders do not offer completely fixed or floating rates or may be conversion from one component to the other might cause an issue later. Borrower should thus be careful in this regard.
The borrower is advised to ensure that the lender offers a clear amortization of loan payback.
Hybrid loans are mostly beneficial for people taking large loans because then risk hedging becomes crucial for them.