Finance

A green loan is simply a type of personal loan. The more important question is: what is a green loan for? Well, it can be used to fund the purchase and installation of approved clean energy products. You might have also heard it called green financing, solar financing or a renewable loan. Whatever you call it, it’s a win, win kind of loan – helping you lower your energy bills while doing your bit for the planet.

Green loans are often offered at a lower interest rate than traditional loans, making it easier for you to play your part in a more sustainable future.

But, like most kinds of finance, green loans come in a few different shapes and sizes. It’s important that you understand your options so you can pick a green loan that works for you

Shades of green

Green loans are a great way for you to access cost-saving clean energy technology without a big lump sum up front and allowing you to spread the cost over monthly repayments. But there are a few choices you’ll need to make when it comes to finance. Here’s the main differences in green loans:

• Secured or unsecured?

You can often access a better rate if you’re willing to put up an asset as security against the loan. But remember, a secured loan gives the lender the right to repossess the asset if you can’t repay the debt.

• Fixed or variable?

You can choose to lock in your interest rate by fixing your loan. You should expect your rates to be a bit higher than with a variable rate, but you’ll avoid the ups and downs of the market and be able to work out the total cost of your loan, to the cent.

Inside a green loan

A green loan, just like any other loan, is made up of several parts. You need to understand each element so you know exactly how your finance works, and make sure it works for you. Here’s what you need to know.

Interest rate

Money, even green money, doesn’t grow on trees. So when you borrow it, you need to pay it back with interest. The percentage of interest that you’ll pay on top of the amount you borrow is usually measured as an annual rate and called the Annual Percentage Rate (APR) or Advertised Rate.

The rate your lender offers will factor in things like your credit history, your repayment schedule, how much risk there is lending to you (looking at the market and your individual situation) and their underlying costs.

You’ll often see a headline advertised rate – this is the lowest rate lenders have available. But you may not be offered this rate. It’s usually only available to a small proportion of borrowers and comes with set conditions to qualify (e.g. a high credit rating).

To get a better picture of the interest you’ll pay, you’ll need a personalised rate. You can get this by contacting a lender and seeing what they’ll offer you. You should talk to a number of providers, but just make sure that their quote process is ‘credit score friendly’. They should only conduct a soft check on your credit file, otherwise it could impact your credit score.

And remember, the best loan for you might not come with the lowest interest rate. It’s important to consider the total cost of the loan including interest, fees and other costs to judge what’s right for you.

Comparison rate

On top of the interest, a green loan will usually come with fees and other charges. When you add them all up, you might find they outweigh the benefits of a great rate. That’s what makes the comparison rate important. A comparison rate factors in the interest rate and any fees, and expresses this cost as an annual percentage. It’s usually higher than the interest rate charged on the loan, but you’ll find it gives you a much better idea of how much the loan will actually cost you.

In fact, under the National Consumer Credit Protection Regulations lenders and brokers must provide a comparison rate when they advertise a loan interest rate – it’s that important.

How is it measured?

Of course, to be a fair comparison rate you need to be comparing apples with apples. So for personal loans, there is a standardised measure for how comparison rates are to be calculated and displayed. For variable and fixed rate personal loans, the comparison rate is based on a $30,000 unsecured loan over 5 years.[SA(2]

But it’s still not the end of the story as not all costs are included. You will still need to consider other potential charges including:

• Late payment fees
• Break costs or early termination fees
• Deferred establishment fees
• Broker fees (when taking out a loan through a broker, the broker’s service fees aren’t included in the comparison rate, which can be significant)

What if there isn’t any interest?

Although most loans come with interest, there’s one small exception. With a 0% interest payment plan, borrowers don’t pay a cent in interest. You will, however, still have to pay a monthly fee.

Repayments

Once you receive your loan, you of course need to start paying it back. You’ll need to agree to make regularly scheduled repayments – either weekly, fortnightly or monthly. And quick tip: check that your loan repayment calculations have been quoted inclusive of any ongoing fees when you factor these repayments into your budget to avoid being caught short.

One variation to this is a balloon payment – your lender might give you the option of making a lump sum repayment at the end of the loan term. It helps reduce your regular repayments which can be a handy way to manage your cash flow. But remember, the lump sum is still due at the end of the loan, so you’ll need to still find the money to pay back the debt. And your interest payments will be higher as you go so you’ll be paying interest on a higher outstanding balance.

Every little bit helps when it comes to building a more sustainable future. And it starts at home.

So if you’d like to be the change you want to see, a green loan can help you get there sooner. But exactly what are green loans used for? Let’s take a look.

For little changes that make a big difference

Green loans can only be used to fund the purchase and installation of energy efficient products. But that’s no small list. They can include:

• Solar panels and home batteries
• Solar pool heating units
• Energy-efficient lighting
• Energy-efficient air conditioning units
• Hybrid low emission cars
• Air source heat pumps
• Power factor correction
• Variable speed and frequency drives

That said, it’s important to note that not all products in the above categories are eligible for a green loan. Green loans are usually offered at a lower interest rate, so it’s important to make sure they’re really going to a green solution.

So, it’s not just a question of what are green loans used for, but does the product you’re looking at qualify. Because to make the cut, renewable energy products must meet strict standards of efficiency and performance.

To find out if what you’re planning for is eligible, simply check with your green loan provider. If your product doesn’t qualify for a green loan, you may still be able to access finance as a general personal loan.

And without the hard work

But it’s often not as hard as it sounds to know if what you’re interested in is eligible for a green loan. Green loan providers usually work with an approved list of product suppliers, installers, and other contractors.

And it can be even easier to pay. When an approved contractor carries out the work on your property, they then submit their invoices directly to your green loan provider. It’s less hassle and helps your hip pocket as you can avoid borrowing any more than you need. Then you’ll repay only the cost of the product itself plus interest.

For a smaller footprint

The green improvements you choose qualify because they’re either more energy efficient than standard alternatives, or they improve the energy efficiency of your home. So you can enjoy the good kind of warming – a heart happy to be helping the planet.

For money in the bank

Reducing your energy consumption often means a boost to your bank balance. Enjoy watching your energy bills come down as your green improvements start to pay for themselves.

For the joy of the open road

Yes, cars are eligible for green loans, too. So you can take your eco efforts out of your home and onto the open road. Buying a hybrid or electric vehicle can earn you a better deal on your car loan – with reduced fees and up to a 1% discount on interest rates. But again, they must meet the eligibility criteria.

Am I eligible?

Application approval and how much you can borrow, varies from loan to loan, and lender to lender.  For starters, you will need to be:

• Over 18 years of age, and in some cases over 21.
• An Australian citizen or permanent resident.
• Earning at least $25,000 per year, from a regular, proven source of income. If you are self employed you will have to provide additional information.
• The holder of a provisional or full driver’s licence.

If you have existing loans or debt there may be fewer options open to you. It’s also a good idea to check the eligibility criteria for any lender you are considering before submitting an application to avoid any unnecessary negative impact to your credit score. Some lenders will have a higher salary threshold, and make a point of only lending to those with a high credit score, in order to offer a low interest rate.

What is the process?

Once you have shortlisted your preferred lenders you can usually request a quote or estimate of your estimated borrowing power and some loan options, before you officially apply. This is a good idea, as this process won’t affect your credit score.

Depending on the lender, you can then apply online, over the phone or in-person if the lender has physical branches. You’ll usually need to verify your identity, connect the lender to your online banking so they can verify your income and expenses and potentially provide additional information based on your loan purpose. For example, if you are applying for a secured loan, you’ll need to provide information about what you are providing as security.

For a green loan, you’ll likely need to advise who you are planning to engage to install your solar panels, so your loan provider can ascertain if they are a reputable and accredited service provider.

If approved, you’ll then need to accept your loan agreement. The majority of green loan agreements can be signed and accepted electronically.

What documents will I need to apply?

To process your application a lender will typically ask you to show

• proof of identification: an Australian drivers licence or a passport
• proof of address: copies of your recent utility bills.
• verification of a stable income: payslips, bank statements or tax returns.
• details of your expenses and liabilities: bank, credit card and loan statements.

Plenti has a streamlined online application portal, where you can connect your bank details securely. That’s one of the ways we make applying for a loan simpler, faster and easier than ever.

What will your lender consider?

Your lender will review:

• Your employment stability
• Your income (eg salary, rent, interest etc)
• Your expenses (eg mortgage, groceries etc)
• Your repayment history on other loans
• Credit agency/bureau information (Credit Report and Score/Rating)
• Which Green Energy installer you are planning to engage, and are they an accredited service provider.

These findings will determine if you’ll be approved, and if so then for how much you’ll be able to borrow. Often the interest rate offered will be lower if you have a good credit rating. If you’ve had problems paying your bills and debts in the past, you may only be offered loans at higher rates.

What is my Credit Score?

Based on the information in your credit report your credit score, or rating, is a single number that sums up how trustworthy you are as a borrower. Credit scores are typically on a scale of 0 – 1,200 or 0 – 1,000 depending on the credit agency. The higher your credit score, the more ‘reliable’ you are perceived to be and the greater the likelihood of your loan being approved, at a lower interest rate. Now that the industry uses comprehensive credit reporting (CCR), credit reports are more detailed so that lenders have a better — positive and negative — picture.

To calculate your credit score, credit agencies will assess:

• How much money you’ve borrowed in the past
• How much credit you currently have
• How many, and what type of credit applications, you’ve made (This can now include payday loans and buy-now-pay-later services such as AfterPay.)
• Whether you usually pay your bills and loan repayments on time
• Any loan defaults
• Any court judgments
• Information from your bank, telco, insurance and utility companies
• Your age, address and employment situation
• Up to two years of your general financial history

You can request your report and rating/score from credit rating agencies before you go through with a loan application. This does not usually impact your credit score. Be aware that because there are multiple credit agencies, the one your lender uses may not be exactly the same.

Get a free credit check from one of Australia’s major credit rating agencies: Equifax, Experian or Illion.

How do I improve my chances of getting approved?

Applying for a green loan has the potential to impact your credit score, particularly if your application is declined. It’s therefore important that you put your best foot forward before beginning the application process. We’ve assembled a useful selection of tips to help you submit a strong loan application.

1. Make sure you pay your existing debts on time: Did you know that repayments that are more than 14 days late may be recorded on your credit file? While less serious than a default, a series of late repayments can have an equally negative impact on your credit score. Making late repayments also sends a bad message to a prospective lender and may result in you paying higher interest rates. If you do ever find yourself behind on your repayments, it’s important you contact your lender directly. Working with your lender toward a mutually beneficial outcome can help to protect your credit score. Remember, it’s far easier to protect a good credit score than it is to bolster a weak one.

2. Only request as much as you need to borrow: When assessing your application a lender will look at whether you can service a loan. What this means is that, after all your expenses, do you have income left over to meet the repayments of your proposed loan. If you request an amount that is more than your finances say you are able to repay, it’s highly unlikely you will get approved. In some cases, a lender may offer you a longer loan term to reduce your repayments but it’s best to do your homework first. Use a repayment calculator and budget to figure out what you can reasonably afford.

3. Review your credit history: Australia has three main credit bureaus, Equifax, Illion, and Experian. You can request a free copy of your credit score once a year. Once you’ve verified your identity (i.e. with a driver’s license, passport etc.) the bureau is required to provide you with your credit report within 10 days. Your credit report will provide an overview of your credit history, including previous loans, existing debts, and your performance as a borrower. You should ensure all the information contained in your credit report is accurate, and if not, contact the bureau to have it remedied. This will have a direct impact on your credit score. If you’re unsure of how to interpret your credit score, see this ASIC guide.

4. Pay down existing debts: Lenders may look unfavourably on an application for individuals with large amounts of debt, particularly if the debts are already at the limits of what you can afford. It’s important to demonstrate a concerted effort to repay your existing debts to a reasonable level. This applies, even if your personal loan is for the purpose of consolidating your debt. While a move to lower interest rates makes sense, it may be harder to get approved unless you’ve opened up some additional capacity between your income and expenses.

5. Minimise your credit card balance: Using a credit card can be a great way to help boost your credit rating by demonstrating you are financially responsible. However, you need to manage your credit card carefully to ensure your balance is consistently low. Failure to make repayments can have an equally negative impact on your credit score. Finally, lenders are now required to assess your application based on your credit card limits, not the outstanding balance. If you have unused cards or excess limits consider reducing them before you apply for a new loan.

6. Within the advertised range, most lenders apply loan capping rules: This means they adjust the maximum loan amount you may be eligible for based on your credit score, income, mortgage status and a range of other factors. This maximum loan eligibility will usually be communicated to you when you get an initial quote or rate estimate from a lender.

7. Counter-offers: Even once you have applied with a lender for a specific loan amount, they may come back to you with a ‘counter-offer’. A ‘counter-offer’ is a conditional approval based on a loan amount that is lower than the amount you’ve requested but one the lender believes you can afford and meets their responsible lending requirements. Whilst it may be tempting to borrow as much as you can, make sure your repayments will be realistic to make within your budget. This will be a significant factor in determining whether your loan will be approved.

At Plenti, we assess your loan application in line with our credit criteria and our responsible lending obligations. Whilst no guarantee, following the tips above will go a long way to improving the prospect of successful loan approval.

How long will it take to get approved?

At Plenti, once your  loan application is approved (and you have accepted your loan contract) your  funds are transferred into your account the following business day.

The funds will be transferred  into the same account that you have nominated for your direct debits.