What is a green loan and where can I get one?

With sustainability at the top of mind for many Australians, getting a green loan can be a way to make costly lifestyle changes without blowing the bank. 

Green loans often offer fairly good rates to make sustainable choices more accessible. This can be especially helpful because options like solar panels and electric vehicles can be more expensive initially than conventional alternatives.

With the cost of energy higher than we like, going green could be a way to save as well as being better for the environment. The Electric Vehicle Council estimates that electric vehicles are significantly cheaper per kilometre than petrol or diesel cars of comparable size and more still when powered by your own rooftop solar system.

Green loans work similarly to other personal loans. You choose how much you need to borrow and over what period, then pay that back gradually, along with any fees and interest accrued. The main difference is that green loans can only be used for purposes approved by the lender, which are specified in the loan agreement.

Green loans also have many of the same features: they can be secured or unsecured, long-term or short-term, and have variable interest rates or fixed interest rates.

For a quick breakdown of these categories:

• Fixed interest rates: Your interest rate remains constant throughout your loan's life, which simplifies budgeting. Fixed rates are usually preferred if you are concerned about potential rate increases, although these loans typically have higher interest rates and stricter conditions.
• Variable interest rates: These rates can change throughout the loan. Rates are generally lower and have more flexible features (like early repayments and redraws), but the interest rates can rise over time.
• Unsecured loan: An unsecured loan isn't held against any asset. Instead, it's cash borrowed based on your credit score and the lender's risk assessment. These loans tend to have higher interest rates but don't directly put your property at risk.
• Secured loan: Secured loans generally have lower interest rates but use an asset as collateral. This means your car, property, or other valuable possessions are put up against the loan and could be repossessed if you default.

As green loans have specific limitations, they often tend to be secured. So make sure that you can pay it off. If you default on repayments, your electric car or solar panels could be seized to cover losses. Make sure you keep up with those payments!

Generally, there are two kinds of green loans: green car loans for hybrid and electric vehicles, and green renovation loans for sustainable home upgrades.

Some common uses for green loans include:

• Solar panel installation
• Sustainable heating or cooling systems
• Double glazing
• Electric vehicle charging
• Water tanks
• Energy-efficient appliances
• Insulation.

Some providers offer even more specific loans, like those exclusively for solar power products. Most are less restricted, but always read the loan details before committing.

With a standard personal loan, unless specified in the terms, you can generally use the funds for a wide range of things. That means everything from holiday loans to debt consolidation loans and home renovation loans are used.

With a green loan, Green loans are usually used for renewable energy or sustainable products. You will also most likely need to retain evidence of your purchase. In most cases, you'll have clear physical evidence like the car in your garage or the solar panels on your roof.

Another difference is that green loans most often have significantly lower interest rates. This is to make sustainable energy more attractive and affordable.

Green car loans are designed specifically for purchasing greener vehicles. These can be particular about the type of car allowed, as it may need to fall into a specific category. 

These are some terms to familiarise yourself with:

• Battery electric vehicles (BEVs): BEVs operate on batteries alone and need to be plugged in to charge. Generally, when referring to electric vehicles (or EVs), this is the type of car people have in mind.
• Hybrid electric vehicles (HEVs): Hybrid electric vehicles run on both electricity and petrol or diesel. The combustion engine charges the electric battery, so these don't need external recharging.
• Plug-in hybrid vehicles (PHEVs): These cars are hybrids running on a combination of petrol and electric, incorporating plug-in charging and defaulting to petrol if not charged.
• New Energy vehicles (NEVs): NEV is a term used by Chinese auto manufacturers to refer to battery electric vehicles and plug-in hybrid vehicles. 
• Low emissions vehicles: This broad term can include the above vehicles as well as newer makes of petrol and diesel cars designed to economise fuel consumption.

Ensure that the car you're interested in qualifies for your chosen green car loan to avoid disappointment.

As you'll be paying this loan off over an agreed upon period, it's important to make sure the features you get work for the borrowing situation you're in.

Here are some features to watch for:

• Fees: A lot of green loans have fees attached. You'll generally find an application fee, but there can also be fees for late payments, early payments, redraws, and more.
• Loan term: The shorter the loan length, the less interest you'll pay, but the higher your repayments will likely be.
• Comparison rate: A comparison rate factors in both the interest rate and fees charged with a specific loan. Comparing loans based on the comparison rate (rather than the advertised rate) gives you a more accurate idea of the full cost.
• Extras: Additional perks like free extra repayments or a flexible repayment schedule can give you the opportunity to pay off your loan earlier and save on interest.

As more people look to incorporate green energy into their homes or build new eco-friendly homes, a growing number of green home loans have become available.

These aren't just designed to finance sustainable energy installation or green renovations, but rather to finance the entire home purchase.

Many of the features you'd use green loans for are the same things that make a home eligible for a green home loan.

Two main factors determine your eligibility for green loans: your creditworthiness and your intent. Along with your income, savings, and employment status, these are all considered by lenders.

Your credit score:

Your lender will perform a credit check to assess how reliably you pay back debt and whether you have a good track record with previous loans and credit lines. They'll review your credit score and history as part of their risk assessment. To improve your chances of approval and get the best interest rate possible, work on improving your credit score.

Why you want the loan:

Your lender will also want to know what you plan to do with the money. If you don't have adequate plans for solar panel installation but have just booked an expensive holiday, questions might be raised.

With sustainability becoming more important, many providers are now offering green loan options. Even the big 4 banks have green options, with Commonwealth Bank offering green options for both car and renovation loans.

You can check out a range of personal loan and car loan options available on our hub pages. Head over and compare today!