What Is a Green Loan? How Do They Work?

Written by Jordan BlansitReviewed by Nathan Brown, CFP®Updated: 8th Apr 2022
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As the world plunges deeper into the climate crisis, upgrading infrastructure – including family homes – to be eco-friendly is more important than ever. But the cost of such upgrades isn’t cheap, despite their long-term saving and environmental benefits. That’s where green loans come in.

What Is a Green Loan?

A green loan is essentially any type of personal loan specifically intended to boost your home’s energy efficiency. While projects like installing low-flow toilets can be relatively cheap, green loans tend to fund larger endeavors that require more capital. For instance, installing solar panels or triple-pane windows.

>> More: Best Home Improvement Loans

How Do Green Loans Work?

While you can get several types of green loans, they share one goal: to improve your home’s energy efficiency. Some common examples of qualifying projects include:

  • Installing solar panels
  • Financing a geothermal heating system
  • Updating your windows, doors, and insulation
  • Buying Energy Star appliances

Depending on your particular project, you may find a bank, credit union, or specialty lender to fund your loan. Some states, localities, and utility companies also support specific energy-efficient upgrades, such as installing solar panels.

Types of Green Loans

Green loans usually take the form of apersonal loan or mortgage. Here’s what to know.

Traditional Green Loans

Some banks, credit unions, and specialty lenders offer “true” green loans, which are commonly used for one-off climate-friendly home improvements. They may be guided by Green Loan Principles, which ensure that projects meet certain environmental objectives.

Green loans may come with strings attached, such as working with a specific installer or equipment. However, they often come with more favorable requirements than personal loans, including low interest rates, 10-25 years terms, and no collateral required.

Depending on your particular project, you may obtain financing directly through the seller instead of a third-party lender. But regardless of your financier, you’ll have to repay your loan in monthly installments (with interest).

Personal Loans

You can also use a traditional personal loan to pay for your upgrades. While they may not hold you to the same standards as traditional green loans, they may also have more unfavorable terms like:

  • Higher interest rates
  • Shorter loan repayment terms
  • Or stricter credit score requirements

You can find both secured and unsecured personal loans at institutions like banks, credit unions, and online lenders.

>> More: Best Personal Loans

Green Home Loans

Green home loans are mortgages that help you achieve your climate-friendly goals by:

  • Purchasing an already-certified green home
  • Buying and converting an existing home to an energy-efficient one
  • Using a cash-out refinance to make necessary upgrades

Green home loans are particularly advantageous if you need to make more than one improvement at a time. Generally, they let you borrow more money at lower interest rates with longer repayment terms.

Green Loans vs. Green Mortgages

Most green loans are categorized as either personal or home improvement loans. And unless you specifically seek out a secured loan, they generally don’t require you to sign over your house or car to qualify. However, they typically only fund one upgrade and come with higher interest rates and shorter repayment terms.

By contrast, green mortgages use your home as collateral against the loan. And if you default, the lender has the right to repossess and sell your property to cover your debts. That said, you can generally borrow more at once to fund multiple projects. You may also qualify for better interest rates and repayment terms up to 30 years.

How to Get a Green Loan

How you apply for a green loan depends on the type of loan you need.

For a traditional green loan, you may have to meet specific qualifications. For instance, the lender may require a home energy audit to prove that your upgrades will provide measurable environmental benefits.

Aside from such particularities, getting a green loan and personal loan typically follow the same process:

  1. Check your credit score and eligibility
  2. Shop and compare lenders
  3. Submit your loan application(s)
  4. Accept the proposal that meets your needs
  5. Repay your debt through monthly installments

Getting a green mortgage can be slightly more involved since you’re using a house as collateral against a much larger loan. Though the process is similar, you may have to jump through additional hoops like:

  • Getting an appraisal
  • Paying for an inspection
  • Conducting an energy audit

>> More: How to Apply for a Personal Loan

What Are the Advantages of Green Loans?

Traditional and home green loans come with significant advantages over regular personal loans, including:

  • Higher loan limits
  • Lower interest rates
  • Longer repayment terms
  • Broader eligibility requirements
  • The availability of funding programs

What Are the Disadvantages of Green Loans?

However, green loans also carry some disadvantages like:

  • Home energy audit requirements (sometimes annually for the life of the loan)
  • Personalized installation requirements – for instance, having to hire a specific company or use certain tools
  • Extra documentation requirements to prove you’re meeting energy efficiency targets
  • Longer payment plans that can increase your interest costs, potentially negating your energy bill savings

What Qualifies as a Green Loan?

A traditional green loan is generally defined as a loan used to upgrade your home’s energy efficiency while subjecting you to specific environmental criteria. They may also have different payment structures than regular personal loans. For example, some solar panel agreements let you add your payments to your electric bill or sell your excess electricity

Are Green Loans Worth It?

For some people, reducing their environmental impact makes a green loan worth it regardless of the financial aspect. But if you’re looking to see savings on your monthly bills, a green loan may or may not be worth it.

The answer there depends on how efficient you make your home versus the expense of your loan. If your loan costs more than you recoup in long-term energy savings (or by selling the house), you may come out in a wash or even in the red.

But if you’re comparing traditional green loans versus personal loans for upgrading your home, green loans typically win out due to their lower interest rates and longer terms. However, that’s not always the case, so be sure to shop around before selecting a particular loan or lender.

Bottom Line: What Is a Green Loan?

Green loans can provide the funding you need to upgrade your home and lower your environmental footprint. And as the need – and push – for green financing grows, more companies will likely pop up to fill the niche and make prohibitive upfront costs more affordable than ever. As always, the key is to research your needs, shop around, and find a lender that works for you.

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Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.