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Green technologies and home improvements are becoming more accessible than ever before.
Shrinking hardware costs and an increase in clean energy products from China have driven down the price of energy-efficient home improvements by about 9x since 2006. Add the flexible green loan framework to the mix and the average American family can now afford to install a solar electric system at a friendly price.
Green loans are helping many Americans invest in clean technologies. Several financial institutions, from small banks to credit unions, offer green loans that are easy to apply for.
Our team at Aspiration has put together a guide to help you get started on your first green loan. Read on to find out more or jump straight to the section most relevant to you.
- What is a green loan?
- What qualifies as a green loan?
- What’s the difference between green loans and traditional loans?
- How do I get a green loan?
- What are green loans good for?
- Who offers green loans?
What is a green loan?
A green loan is a type of loan given to a project or an investment that will provide clear environmental benefits. Borrowers can use the loan proceeds to fund sustainable projects, such as solar panel installation or electric vehicle purchases.
Green lending is highly popular today thanks to government initiatives to help homeowners and business owners switch to environmentally-friendly technologies.
The alarming rise in greenhouse gases, coupled with our increased awareness of climate change, have prompted government officials and private citizens alike to rethink our reliance on fossil fuels, and encourage greater adoption of cleaner alternatives. Green loans are a sustainable finance option developed to inspire people to invest in greener technologies.
What qualifies as a green loan?
Green loans are guided by Green Loan Principles (GLP) that make sure that each investment produces the required environmental outcomes. Each project financed by a green loan has to address an environmental issue, such as air pollution or natural resources depletion, justify how it will meet its environmental sustainability objectives, and be subject to an evaluation after completion. Specifically, a green loan should satisfy the following components:
- Use of Proceeds: An eligible green project should provide clear environmental benefits. These benefits are measured, assessed, and reported by the borrower.
- Project Evaluation and Selection: Borrowers must provide visibility into their intentions for selecting sustainable projects eligible for financing.
- Management of Proceeds: Green loan proceeds must be credited to a dedicated account or monitored by the borrower to ensure proceeds are aligned with the original sustainability initiatives.
- Reporting: The Green Loan Principles recommend a mix of qualitative and quantitative data points to report on the project’s environmental outcomes.
What’s the difference between green loans and traditional loans
Unlike traditional loans, green loans are given only to investments that are certified to be environmentally-friendly. They tend to have more favorable conditions than traditional loans as they’re designed to make it cheaper and easier for homeowners and business owners to switch to energy-saving, eco-friendly products, and systems.
The first key difference between green loans and traditional loans comes down to interest rates.
Green loans typically have interest rates below 5%. That’s low compared to what most banks charge for a personal loan, at an average of 9%. The low-interest rates make it enticing for borrowers to enter into long loan terms, which are typical of clean energy investments.
In addition, to get most green loans, you do not need to show any collateral. Most states with green lending programs do not require you to have home equity or cash upfront to be eligible for a loan.
This condition lowers the barrier of entry for a lot of people who’d like to invest in green products but don’t have the means to do so.
Whereas traditional loans usually need to be repaid in 1 to 5 years, repayment of many green loans can be spread out over 10 to 25 years.
Some banks even offer options for borrowers to add the repayments to their monthly electricity bill each month.
Credit scores and applicant backgrounds
It’s a known fact that households with low incomes often need high credit scores to secure loans. Banks designed this system to protect themselves from defaults on debt repayments.
Green loans often do away with this heavy credit score dependency. They’re available to borrowers with a wide range of credit scores to help everyone, from those in low-income communities to those in wealthier neighborhoods, make purchases that will help them lower their carbon emissions.
How do I get a green loan?
Applying for a green loan can be a straightforward and easy process. A few evaluations of your proposed investment are required before the loan is given. But once you’ve secured the loan, repayment is simple and stress-free. Find the main steps below:
- Check your credit score.
- Plan your green project and estimate the project cost.
- Research green lenders.
- Apply and wait.
If you’re planning to get a green loan, you should first make sure that you understand the terms and conditions of the loan. Green loans are only given to projects that provide measurable environmental benefits, such as electric vehicles that produce low carbon dioxide emissions.
Home improvements, such as a solar power system installation, will require energy audits to assess your home’s energy efficiency and determine the costs and benefits of the improvements.
Businesses can also apply for green loans to make their facilities LEED-certified. The audit will also be used to make sure that the investment is not being made as part of a “greenwashing” scheme, wherein the so-called environmentally-friendly system only acts as a marketing ploy and does not produce the positive environmental impact promised.
Strict adherence to the conditions of the green loan will be required. Borrowers may need to provide annual reports on the performance of their green investments until the loan is fully drawn. This could include information such as electricity generation, greenhouse gas emissions reduced or avoided, and resource efficiency.
What are green loans good for?
In recent years, many Americans have received green loan proceeds to purchase a wide variety of environmentally-friendly products, from electric vehicles to geothermal heating systems. Once considered expensive, these products and systems are now becoming accessible thanks to the availability of green loans. Here’s a look at the green investments worth your money.
Clean energy vehicles
Clean private transportation is one of the easiest, and most popular, ways to reduce greenhouse gas emissions in our towns and cities. It’s also one of the top investments that people use green loans to pay for.
Credit Unions, such as the Clean Energy Credit Union, and other financial institutions across the United States offer green loans for all-electric, plug-in hybrid electric, and hybrid vehicles. Loan terms for these vehicles are available up to 84 months with some lenders, and most banks offer fixed interest rates.
Environmentally-friendly building improvements
Green loans have also become popular with the recent trend to make buildings more climate-resilient and environmentally-friendly.
Homeowners and business owners who want to make their buildings more energy-efficient and less polluting can easily take out green loans to finance improvements. A “green mortgage” or “energy efficient mortgage” is a type of loan for real estate development or renovations. A borrower must show that their sustainable projects meet the green covenants outlined in the agreement. For those with green buildings, this may be a great green finance option to help meet sustainable development goals. Solar electric system installations, geothermal heating systems, hurricane proof windows, double glazing, LED lighting, and eco-friendly landscaping are all investments that are eligible for green loans.
Environmental sustainability projects
Businesses and organizations can also obtain green loans to fund environmental sustainability projects.
Organic farms, community conservation projects, and recycling projects are just some of the initiatives that fit into the criteria of green loans. These projects help build a sense of community while also protecting environmental health.
Organic farms, for example, can grow fruits and leafy green to provide extra sources of nutrition for community members. Recycling stations can be introduced by small businesses to help neighborhoods divert their waste from landfills to processing plants.
Green loans provide a quick and sustainable way of bringing these projects to life.
Who offers green loans?
Green loans are still considered new financial products. For now, it’s mostly credit unions and small banks that offer green loans. Here are 3 banks that offer green loans with attractive terms.
Accion is a nonprofit community lender that works with entrepreneurs to build sustainable, impactful businesses. They’ve helped fund waste collection and recycling startups and are in the works to finance clean transport vehicles and innovative eco-products.
Their green loans start at $50,000 and can go up to $250,000 – offered based on how well established the business is. They’re also welcoming to new entrepreneurs seeking rapid loans of around $8,000 to kickstart their green businesses.
Accion is also Aspiration’s Opportunity Fund partner. Together, they provide microloans of $5,000 and less to support American entrepreneurs needing quick turnaround financing. One microloan helps small business owners create or retain, on average, 4.8 jobs.
2. Clean Energy Credit Union
Clean Energy Credit Union’s mission is to help everyone afford clean energy systems. They offer customized loans with amazing terms that reduce the cost of clean energy products and services.
Their green loans cover investments ranging from clean energy vehicles to solar electric systems. They offer loan repayment periods of up to 20 years for solar electric systems and 6 years for electric or hybrid vehicle purchases.
What’s more, Clean Energy Credit Union has fixed interest rates on its loans and does not charge any prepayment penalties.
3. VSECU – Vermont Credit Union
VSECU provides green loans for homeowners and business owners who want to purchase energy-efficient home and transport investments. If you’re looking to buy a new e-bike, high-efficiency heat pump, energy-efficient appliance, or an electric vehicle, Vermont Credit Union could a good bank for you.
Their loans have low-interest rates, no upfront payments, and long repayment terms that will help you save money as you switch to clean energy technologies.
Taking out green loans can make a difference
Taking out a green loan can really help you save money in the long term.
If you’re installing a solar energy system for your home using a green loan, you could save between $10,000 and $70,000 over the 25-year warranty period of most solar power systems. Or if a geothermal unit is what you need, you could save as much as $1,500 per year over the 10 to 20 year payback period of the investment.
And the price of these systems is expected to drop as these clean energy investments become increasingly popular. The US Solar Energy Industries Association estimates that by 2023, the United States will have over 4 million homes with solar energy installations.
Taking out a green loan helps you switch to clean energy technologies faster. It also reduces your personal carbon emissions much faster than other purchases. You can make a difference to the planet and your pocket today with a green loan.