If you’re considering a home equity line of credit to update your insulation, a traditional car loan to purchase an electric vehicle, or a second mortgage to add solar panels to your home, you might be missing out on a special lending product that can help you save: green loans.
Green loans are lending solutions designed specifically for green projects or to develop green products. Green financing can offer a variety of benefits for borrowers (like lower interest rates) and borrowing through a green lending credit union can help you achieve an even more affordable loan.
In this guide, we’re breaking down all things sustainable financing: green loans, different types, their benefits, and more.
Understanding Green Loans
Green loans (sometimes called sustainable financing products) are lending tools designed to support green projects. Whether you look to invest in energy efficiency improvements to your home or develop an innovative, sustainable product, a green loan is likely an advantageous option for you.
While traditional loans are used for a variety of purposes, green loans are specifically designed to help borrowers make a positive environmental impact. Additionally, lenders often offer financial incentives to reward borrowers for their positive contribution, like lower interest rates.
Types of Green Loans
Consumers can access a wide variety of green loans. A few examples include:
- Green personal loans – Banks and credit unions offer green personal loans to fund home improvement projects like insulation upgrades, window replacements, HVAC improvements, and solar panel installation.
- Green home equity loans – The green alternative to a traditional second mortgage, a green home equity loan lends borrowers funds to complete projects like the ones described above. Since borrowers leverage home equity as collateral, they might receive lower interest rates than they would on personal loans.
- Green commercial loans – Green loans aren’t just available for homeowners—business owners and commercial property owners can also qualify for green loans for product development or energy-efficient property improvements.
- Green auto loans – If you plan on purchasing an electric, hybrid, or alternative fuel vehicle, you could qualify for a green car loan, which is a lending product designed to finance green auto purchases.
Benefits of Green Loans
Depending on your lender, loan product, and credit history, you can reap a variety of benefits by pursuing green financing:
- Lower interest rates – As a positive incentive to borrow funds for environmentally-conscious purposes, lenders often charge lower interest rates on green loans.
- Additional loan proceeds – Energy-efficient upgrades can be more costly than standard alternatives: one look at electric car price tags will tell you as much. To compensate for additional project costs, lenders often offer larger loan principal amounts than they would for traditional loans.
- Green services – Some lenders connect borrowers with green energy service providers to offer free or low-cost energy audits, green project consulting, and other support channels that could benefit your project.
- Environmental benefits – And of course, let’s not forget that the purpose of green loan projects is to make a positive impact on the environment around you and at large.
Popular Uses for Green Loans
Homeowners, businesses, and entrepreneurs will use funds from a green loan for any of the following purposes:
- Developing a new project, product, or service with a positive environmental impact
- Upgrading a home HVAC system to a more energy-efficient model
- Replacing your windows to decrease drafts and reduce energy use
- Updating your electrical system or lighting to support energy efficiency
- Adding or replacing insulation to prevent air leakage
- Purchasing an electric or alternative fuel vehicle to reduce reliance on fossil fuels
- Replacing old appliances with new, energy-efficient models
- Adding a solar panel, solar electric car charging station, or solar appliance to a property
But this is just the tip of the iceberg. If you have a big idea that could positively impact the planet, you may be able to fund your project with green financing.
Eligibility and Qualifications for Green Loans
Like traditional lending products, borrowers must still display creditworthiness and financial responsibility to get approved for a green loan. Borrowers should expect lenders to review their:
- Income – Larger loan principals often demand a higher income.
- Debt-to-income (DTI) ratio – If you have a high DTI, you may be less likely to qualify.
- Credit score – You must display overall creditworthiness to secure loans in most cases.
Overall, lenders want to know whether or not you can manage debt responsibly. Green lenders also want to know that your borrowed funds will positively impact your footprint or the environment: expect to show proof of how your project will accomplish a green purpose.
Securing a Green Loan Through a Credit Union: Benefits and More
Generally speaking, credit unions are superior to traditional banks in many ways: they’re owned by their members (so members reap the financial benefits of their success), they’re engaged in the local economy, and offer excellent customer service.
But credit unions are also advantageous places to secure green financing:
- They offer better loan repayment terms – Credit unions are nonprofit organizations run by small, local teams—so, their operating costs are generally lower. Since it costs them less to manage your loan, they can charge lower interest rates and reduce your monthly payments by extending repayment timelines.
- They’re invested in the communities they serve – Credit unions are run by people who live in your community—thus, they care deeply about the neighborhood’s overall sustainability. To help improve the community, they’re highly motivated to help you secure a green loan.
- They use interest income for good – If your credit union makes a profit on your loan via interest, it’s reinvested into the community via contributions to local programs or higher interest payments on members’ savings accounts.
Ultimately, a “green” mentality fits well with the credit union mission: people helping people.
