What are green loans?

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A green loan is a type of financing or credit product that is issued primarily for upgrades and installations to a property for the purpose of conserving energy resources and saving money through lower utility bills.

Two of the most common types of green loans involve the following:

  • Installing energy-saving devices in a home, and
  • Performing energy-efficient upgrades throughout a property

The concept of green lending has evolved over the years. Energy conservation first took off as a nationally popular issue during the OPEC oil embargo of 1973- 1974. The resulting oil shortage caused petroleum prices to spike in the United States and around the world. As energy costs began to skyrocket, a national campaign focused on energy conservation to help offset rising energy costs.

As the focus on the environment took root, emphasis was placed on conserving energy and environmental resources with such steps as raising mileage standards for automobiles and encouraging lower thermostats settings in the winter. The green movement involved a collection of conservation standards developed by industry, federal government agencies and state governments.

Prior to the characterization of green loans as loans dedicated to energy-efficient improvements, such improvements were typically funded by way of a general home improvement loan or home equity loan. The emergence of the term “green” as it applies to conservation has taken hold over the past decade and now includes all things dedicated to conservation, renewables and recycling.

A green loan can be a secured or unsecured loan. A secured loan requires that a lien be placed on the property being improved and can only be released once the loan has been retired. An unsecured green loan is primarily a signature or personal loan in nature with no collateral required.

Green loan characteristics

Green loans typically carry lower interest rates, especially when financed as a home equity loan, compared with loans that are not collateralized or otherwise secured.

Green loan funds are applied to specific, energy-saving and conservation applications and may be eligible for an income tax credit on both federal and state returns. A tax credit may be available for the purchase of energy-efficient appliance upgrades such as energy-efficient furnaces, air conditioners or water heaters. Other tax credits may be available from time to time for such things as home weatherization, insulation, caulking and energy-efficient windows.

Other green loans can be issued for the purposes of installing solar panels or replacing outdoor lawns with xeriscaping, a method that reduces or eliminates the requirements for artificial watering or irrigation by replacing grasses and shrubs with drought-tolerant species of plants, rocks and other natural landscaping.

Although there is widespread awareness of the need to conserve energy, using renewable energy and energy-efficient technology often requires a large investment. The costs may be so high that even those who strongly believe in conservation may be unable to take the steps they want to improve their homes and properties.

That’s where green loans come in. By providing low-cost loans for green projects and upgrades, lenders can provide the investment funds needed to help property owners make the jump into green.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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