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. 

“As we live in a world where concerns about climate change and sustainability are only growing, it makes sense that Australian consumers are looking to do their part, whether that’s through environmentally friendly domestic upgrades or choosing an electric vehicle,” says Mozo Banking Expert Peter Marshall.

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

As more and more people look to make these changes in their personal lives, with Australia aiming to reach net-zero emissions by 2050, more providers are offering green loans. Marshall says: “Lenders are responding to this trend by offering green loan products, a handful of which come with some of the lowest interest rates available on the Mozo database.”

When we compare the average rates on green loans to those on other loans, we can see proof that green loans generally offer lower interest rates. At the time of writing, the current average rate for an unsecured personal loan in the Mozo database is 10.50% p.a.* across variable and fixed rate loans, compared to the average rate of an unsecured green loan in the Mozo database, which is 6.62% p.a.* for variable rate loans and 6.93% p.a.* for 3-year fixed-rate loans.

With the cost of energy soaring and provider numbers dropping - find the figures in our latest energy report - going green can lead to longer-term savings as well as being better for the environment. The Electric Vehicle Council estimates that an electric vehicle is $10 cheaper per kilometre than a petrol or diesel car of comparable size.

Green loans work pretty much the same as any other personal loan. 

You choose how much you need to borrow and over what time period and pay that back gradually, along with any fees and interest accrued on the loan. Of course, there’s a little bit more to it than that.

Green loans can only be used for purposes approved by the lender, which will be specified in the loan agreement. Green loans are also offered in the same ways as other personal loans - they can be secured or unsecured, long-term or short-term, and have variable interest rates or fixed interest rates. You can learn more about those on their associated pages.

For a quick breakdown of these categories, remember the following:

• Fixed interest rates: Your interest rate stays the same for the life of your loan, making it easier to budget. This is an attractive option if you're worried about a rate hike down the track in a rocky financial climate, but they do tend to be attached to higher interest rates and more rigid conditions.

• Variable interest rates: These rates are subject to change throughout the course of 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 other asset - it’s cash borrowed, depending on your credit score and the lender's risk assessment. These loans tend to have higher interest rates but also don’t put your property at risk.

• Secured loan: Secured loans generally have lower interest rates but use an asset as collateral. This means that your car, property, or other valuable possessions get put up against the loan and could potentially be repossessed by the lender if you default on the loan.

As green loans have specific limitations, they do tend to be secured. This means that if you default on your repayments, your electric car or solar panels could be seized to make up for any losses. So be sure you get those payments made!

Generally speaking, there are two kinds of green loans. There are green car loans for use on hybrid and electric vehicles and green renovation loans, for use adding sustainable upgrades to homes.

Some common things green loans are used for include:

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

Some providers also offer even more specific loans, like the Police Credit Union Solar Eco Loan (which can only be used to purchase solar power products). The vast majority are less restricted, but make sure you read up on the loan details before committing.

Apart from the obvious - that a green loan is for specific use on renewable energy or sustainable products - there are a few key differences.

When you take out a personal loan, unless specified in the terms of the loan agreement (as is the case with a green loan or some kinds of medical loans and most car loans), you can generally use the funds on whatever you want. That means everything from holiday loans to debt consolidation loans and home renovation loans.

With a green loan, you will most likely need to retain evidence of your purchase. In most cases, you’ll have pretty clear physical evidence - the car in your garage or the solar panels on your roof. 

Another key factor in making green loans different from personal loans is that they most often have significantly lower interest rates. This is to make sustainable energy more attractive and more affordable.

Green car loans are designed specifically to let you purchase greener vehicles. These can be especially finicky with regards to the type of car allowed, as it may have to fall into a specific category. These are some terms to familiarise yourself with, which may be included or excluded from a specific loan:

• Battery electric vehicles (BEVs): BEVs operate on battery alone, which means they 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 that these don’t need to be recharged.
• Plug-in hybrid vehicles (PHEVs): These cars are hybrids that run on a combination of petrol and electric, and as the name suggests, they incorporate plug-in charging and, if not charged, will default to petrol.
• Low emissions vehicles: This is a broad term that can include the above vehicles as well as newer makes of petrol and diesel cars designed to economise fuel consumption, which may be considered by certain green car loans.

Ensure that the car you’re interested in qualifies for the green car loan you’re looking at, or you could be setting yourself up for a nasty shock.

There’s a huge range of green loans available. As you will be paying this loan off over a considerable term, you want to ensure the features you settle on work for what you need. Here are some features you might want to watch for in a green loan.

• Fees: Almost all green loans have fees attached. You will almost always find an application fee for a loan, 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 more your repayments will likely be.
• Comparison rate: A comparison rate factors in the interest rate and the fees you’ll be charged with a specific loan. Often, comparing home renovation loans based on the comparison rate (rather than the advertised rate) gives you a more accurate idea of the full cost of the loan.
• 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 bring green energy through their homes and even into building new homes, a growing number of green home loans are available. 

These are not just designed to finance the installation of sustainable energy or renovation of a home to be more green, but rather to finance the purchase of a home altogether. 

Many of the features you’ll use green loans for are the same things that make a home eligible for a green home loan. Be sure to check out our guide to green home loans.

Two main things will determine your eligibility for green loans: your creditworthiness and your intent. Along with your income, savings, and employment status – these are all looked to by lenders to determine eligibility for a green loan.

Your credit score:

First, let’s look at your credit score and history. Your lender will perform a credit check, as they’ll want to minimise their risk of loaning money and not getting it back. 

This will tell them how good you are at paying back debt and whether or not you have a good track record with making repayments on previous loans and lines of credit. To better your chances of being approved for a loan and to get the best interest rate possible, you’ll want to do what you can to improve your credit score.

Why you want the loan:

Your lender will also be curious about what you want to do with the money. If you haven’t got adequate plans for solar panel installation but have just booked an expensive vacation, there might be some questions raised.

With so many people looking to switch things up, lots of providers have jumped on the green loans train. In fact, nearly every lender now offers a green loan option, including online lenders and peer-to-peer providers.

Even the big 4 banks have covered ground with eco loans, with Commonwealth Bank offering green options for both car and renovation loans. 

In fact, in total, there are more than 15 providers in the Mozo database who offer green loans. Some offer both green loans generally as well as specific green car loans. 

Keep reading to find some editor’s picks of green loans to watch.

We’ve highlighted a few loans you might want to take a look at, as well as listing off a few more green loans on the market at the moment.

You might also want to check out our Mozo Experts Choice Awards for Personal Loans to see which other loans stood out, including green loans. Below, we’ve listed some of the other green loans on the market - though keep an eye on our Personal Loans news hub, because more are being added all the time!

Green Car Loans

• loans.com.au - Clean Green Car Loan

• Transport Mutual Credit Union - GreenRoad Car Loan

• RACQ Bank - Green Car Loan

• Queensland Country Bank - Green Car Loan
• Bank First - Green Car Loan

Green loans

• Bendigo Bank - Green Personal Loan

• Police Bank - Green Loan 

• Handypay - Green Loan

• Commonwealth Bank - Green Personal Loan

• Australian Military Bank - Green Loan

• Australian Mutual Bank - Green Loan

• Bank First - Green Personal Loan

• Community First Bank - Green Loan

• RACQ Bank - Green Personal Loan

• South West Slopes Credit Union - Greener Futures Loan

If you’re interested in keeping your finances sustainable, be sure to swing by our green finance hub. To see more standout loans, take a look at our best personal loans.

*These rates for a new unsecured personal loan of $10,000 are correct as at 16/11/2023, but may be subject to change following this date.