Guide to Green Loans

Lauren WardUpdated March 14, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

What is a green loan? It's a personal loan used for home improvements that make your house more energy efficient or sustainable. Green loans provide financing so you can spread out the cost of these projects over time, while getting the work done now so you can start reaping the environmental and financial benefits.Read on to learn more about green loans and how they work.

What Are Green Loans?

The green loan meaning is a type of personal loan used to give your home environmentally-friendly features. A green personal loan could cover energy efficient improvements like solar panels, new windows, or tankless water heaters. Not only do green loans help you make renovations that may help reduce your carbon footprint, they might also help you qualify for a tax credit. The IRS has increased the energy efficient home improvement credit starting in 2023. Now, instead of a lifetime limit of $500, you may qualify for a tax credit of up to about $1,200 per year.

How Do Green Loans Work?

A green loan works like any other personal loan. In fact, home improvements are what personal loans are used for in many cases. Once your application for a green loan is approved, you receive the loan amount as a lump sum. Some lenders may require your loan to be used for certain home-related expenses, while others may not make any specifications. The amount of time you have to repay the loan is scheduled over a set period, typically several years. Your monthly payments on a green energy loan consist of the loan principal as well as interest. It may also include any fees that were charged when you took out the loan.

What Can Green Loans Be Used For?

A green energy loan can be used for a number of home improvement projects, including:

Solar panels
Insulation
Tankless water heaters
Energy-efficient exterior doors
Energy-efficient windows
Energy-efficient appliances
Smart thermostats
Low-flow toilets and shower heads

There is a list of projects and expenses that qualify for the federal energy efficient home improvement tax credit. In order to take potentially advantage of the credit, make sure your home project qualifies. Recommended: Installing Solar Panels: What Are the Typical Costs?

The Importance of Green Loans

Green loans can have a major impact on both the environment and your home expenses. By reducing the amount of energy you use, you'll generally contribute to reducing greenhouse gas emissions from fossil fuel and electricity. On top of that, you could likely reduce your living expenses each month. A tankless water heater, for instance, can be up to 34% more efficient than a traditional water heater. Installing solar panels could save you $20,000 to $75,000 during the lifespan of the panels.However, green loans may sometimes be difficult to find. Fortunately, you can use a personal loan or unsecured home improvement loan instead to cover the costs of your project.Recommended: Gas vs. Electric Stove: Which Is Better?

How Can You Get a Green Loan?

Every lender has their own requirements for a personal loan, including a green loan. Typically, a higher credit score will get you a better interest rate. Lenders also look at your income compared to the amount of debt you have as they’re determining how much money to lend you. Using this debt-to-income ratio, they'll calculate how much you can affordably repay each month over the loan term. It's typically easy to apply for a personal loan or a green loan in person or online. You'll likely need to provide proof of your ID and address, and some type of income verification, like a paystub, bank statement, or tax return. You’ll fill out the application and the lender checks your credit to decide whether to approve you.

Green Loans vs. Sustainability-Linked Loans

Green loan is a term used for a personal loan used to finance environmentally-friendly home improvement projects. A sustainability-linked loan is a type of business loan used by organizations to meet sustainability performance targets, or SPTs. The funds from these loans are typically used to help achieve sustainability and corporate social responsibility goals. Unlike a green personal loan, organizations that take out a sustainability-linked loan need to report on the progress of their objectives.

Pros and Cons of Green Loans

Green loans come with advantages and drawbacks to consider. While they may help you save money and make your home more environmentally friendly, it can sometimes be difficult to find green loans.

Pros	Cons
• May reduce your carbon footprint	• Interest and lender fees might increase the costs of the loan
• Might lower monthly utility expenses	• Level of environmental impact for your home may be unclear
• Could qualify for energy efficient tax credit	• May be difficult to find

Alternatives to Green Loans

Home equity loan or HELOC. One alternative to a green loan is a home equity loan or a home equity line of credit (HELOC). These types of financing let you borrow funds based on the amount of equity you have in your house. The interest rates are typically lower than they are for a green personal loan. The interest on home equity financing may be tax deductible if the funds are used to improve the value of your home.

However, home equity loans and HELOCs use your house as collateral. If you fall behind on your payments, your home could go into foreclosure. You'll also have to repay the loan when you sell your house. If the value of your home decreases, you may end up owing more than the selling price.

Cash-out refinance. A cash-out refinance allows you to refinance your mortgage while borrowing money at the same time, based on the equity you have in your home. With cash-out refinance, you borrow a new mortgage for a larger amount than the current mortgage. You receive the difference in cash for your home project. Lenders often limit cash-out refinances to 80 percent of the equity a borrower has in their home. You’ll pay closing costs and need to have your house appraised.

Personal loan. Another option is to take out a traditional personal loan or personal loans for home improvement. With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. The higher your credit score, the lower the interest rate you may get. You can shop around for the best personal loan rates and terms.

One of the benefits of personal loans is that you can use them for virtually any purpose, including home renovations. A personal loan could give you the money you need to pay for your energy-efficient home improvement projects.

The Takeaway

You can use a green loan to make environmentally-friendly improvements and renovations to help increase the energy efficiency of your home. Not only will these projects help you reduce your carbon footprint, they could also lower the costs of your energy bills and help you qualify for a tax deduction. Green loans, just like home improvement loans, are a type of personal loan. You can explore your personal loan options to get the best deal for your situation. Lantern by SoFi makes the process easy. By filling out one simple form you’ll get offers from multiple lenders all at once. That way you can conveniently compare rates and terms and choose the option that makes the most sense for your energy-efficient home project needs.

Frequently Asked Questions

What are green loans?

What can you use a green loan for?

How can I get a green loan?

Photo credit: iStock/artisteer

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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