Green personal loans Australia

A green personal loan works much the same as any other kind of personal loan, with the main differences being the types of expenses the loan can be used to fund and the more favourable interest rates and fees that some green loans offer.

If your application is successful, your lender will loan you an amount of money, known as the balance, and you will have a set period of time (known as the ‘term’ of the loan) to pay it back, along with interest, either at a fixed or variable rate.

Some green loans will allow the borrower to make extra repayments and pay off the loan earlier than the date specified in the loan agreement. If you are keen to pay off your loan sooner than planned to save money on interest, it’s important to check if your lender charges any fees for making extra payments or any early repayment fees when the loan is paid off.

The types of products you can purchase using a green loan may vary between lenders, but in general it can be used to purchase products that are more efficient in energy or water usage, reduce your reliance on the grid or reduce pollution.

It is a good idea to ask the lender directly to determine whether the purchase you have in mind qualifies for a green loan. For example, the product may need to meet a particular star rating in energy efficiency.

Some products that you may be able to purchase using a green loan include:

• Solar panels, hot water systems, pool heater or battery systems
• “Green” or eco-friendly vehicles
• Double glazing for windows or external awnings
• Water tanks
• Insulation
• Grey water treatment systems
• Energy-efficient appliances and white goods
• Energy-efficient electric heaters or split system, evaporative cooler or energy-efficient air conditioner
• Home ventilation

Depending on your own needs and circumstances, some reasons you might opt for a green loan could include:

• You can take steps to make a positive change for the environment: Taking out a green loan to purchase something such as water tanks, solar panels or batteries for solar storage could be a positive step towards supporting the environment, and will potentially allow you to do these things faster than if you saved up to pay cash.
• You could save long term on bills: Installing solar panels and batteries in your home may involve an initial expense, which a green loan could help pay for. But over time, you could find that you rely less on the power grid and save on bills. You may even find that the savings you make by going green can begin to offset the borrowing costs of the loan, something that may not be the case if you were to take out a regular loan to purchase something such as a standard petrol car.
• You may get an appealing interest rate: Many lenders offer a discounted interest rate on their green loans, compared to their equivalent standard personal loan. This means borrowers may be able to save on some of the costs they would otherwise incur.

If you are considering taking out a green loan to make a purchase, there are some things to be mindful of, including:

• Strict eligibility criteria: When applying for a green loan, you will need to make sure that the item you plan to purchase meets with your lender’s specifications for energy output or efficiency. Depending on the provider and their eligibility requirements, you may find that the green product you wish to buy does not meet their requirements for a green loan.
• You will be taking on debt: A green loan is a form of debt, and when you take out a loan, your broader finances and borrowing capacity elsewhere could be affected. This may not present an issue for all borrowers, but if you are considering applying for a home loan soon, it’s worth keeping in mind that lenders will consider your existing debts when calculating how much they are willing to lend you.
• Buying with finance will be more expensive in the long run: When you take out a green loan to purchase something such as solar panels and a solar battery for your home, you will pay it off over a period of time, potentially several years. You will also have to pay interest on the loan along with the principal. This means that, in the long run, you will end up paying more than if you had initially paid cash.

When you apply for a green loan, much like when you apply for any other sort of personal loan, the lender will consider a range of factors relating to your financial position, including your credit score. However, for a green loan you will also need to demonstrate that you are eligible based on the item or project the loan will be funding.

For example, some lenders in Australia who provide green loans will follow what are known as the Green Loan Principles (GLP), a set of guidelines designed to promote the development and integrity of green loan products.

These principles state that borrowers of green loans should outline their green objectives to lenders.

In practice, this could be as simple as providing your lender with the details of your planned purchase (a solar-powered battery for your home, say) to make sure it meets their green requirements and the purchase is eligible.

However, some lenders may be stricter at application time and require you to submit a quote from an approved supplier for the green product you intend to use the loan funds for.

In more general terms, when applying for a loan, you will be required to provide documentation such as:

• ID documents such as a driver licence or passport to prove that you are aged over 18 and an Australian resident.
• Proof of income, typically in the form of pay-as-you-go (PAYG) payslips from your employer, to show that you earn a regular income that is sufficient to cover the loan’s minimum requirements.
• Your employment details for the past three years.
• Proof of savings, typically in the form of bank statements, to give the lender a picture of how you manage your finances.
• A list of any assets you own, including assets such as vehicles and property.
• A list of any debts you may have, such as other personal loans or home loans, credit card debts and credit limits, outstanding buy now pay later (BNPL) balances and the like.
• Details of your general living expenses, including groceries, utilities, streaming services, rent, medical and transport costs, school fees and so on.

When comparing green loans to find out if there is one suitable for you, an important thing to consider is what kind of green loans the provider offers, and whether they are suitable for your purpose.

Depending on the provider, some green loans may have specifications that your purchase will need to meet requirements, which could be in relation to the amount of energy a solar battery system needs to generate, or its energy efficiency rating.

In addition to establishing what a green loan covers, some other likely things you might consider when comparing loans include:

• Whether the loan is fixed or variable: A fixed interest rate will remain the same throughout the term of the loan, while a variable one can fluctuate, moving depending on the decisions of your lender and market forces. You may prefer the certainty of a fixed rate, or you may decide to seek out a competitive variable one, depending on your preferences and what lenders are willing to offer.
• Whether the loan is secured or unsecured: A secured loan is a loan that is secured against an asset. If for example you use a green loan to purchase an electric vehicle, the vehicle itself would typically be the security, and your lender would have the right to reclaim it in order to cover costs if you cannot make repayments. An unsecured loan is not secured against an asset, and if you are unable to make your repayments, your lender might take you to court to recover their costs.
• The interest rate: Interest rates can vary depending on such things as the loan provider, whether the loan is secured or unsecured, as well as your own financial position, including your credit score and whether or not you are borrowing with a loan guarantor.
• Fees and charges: As with any other kind of loans, green personal loans can come with a variety of fees and charges, such as application fees, monthly or annual fees, missed payment fees and early payment fees.
• The comparison rate: The comparison rate of a loan is designed to give you an idea of what the total cost of that loan might be per year. It takes into account the total cost of interest as well as most fees and charges.
• The length of the loan term: The term is the amount of time you will have in which to pay off a loan. A loan with a longer term may have lower repayments, but it also means you will pay more interest over the life of the loan.
• Flexibility around additional repayments: Many lenders on Canstar’s database allow borrowers to make extra payments above and beyond what is owed each month, as well as lump sum payments. Doing this can help the borrower save on interest. Some lenders may charge additional fees for this, though, so it is important to check whether this is the case with your loan provider.