Green loans for home energy improvements

A green loan is a loan from a credit union that pays for work or purchases that save energy or cut a home's carbon footprint: insulation, a new boiler or heat pump, solar panels, better windows and doors, and in some cases electric vehicles and chargers. Credit unions are not-for-profit community lenders that provide affordable loans and savings to their members¹, and a green loan is simply one of their loan products, aimed at energy improvements rather than at a general purpose.

The amounts are modest compared with a mortgage. One credit union lends between £500 and £15,000 under its green loan², and credit unions in Wales have offered loans from as little as £50 up to £15,000³. Interest is capped by law: a credit union in Great Britain may charge no more than 3% a month on a loan, an APR of 42.6%⁴, and many green loans are priced well below that ceiling, with no fees or penalties attached².

What a credit union green loan is and what it pays for

A credit union is a group of people connected by a "common bond", based on the area they live in, the occupation they work in or the employer they work for, who save together and lend to each other at a fair and reasonable rate of interest⁷. It is a financial co-operative providing savings, loans and a range of services to its members, and the Welsh Government describes credit unions as not-for-profit community lenders providing affordable loans and savings¹. A green loan is one of the things this kind of lender offers.

All credit unions can lend small amounts of money for all purposes, and some can lend larger amounts over longer periods, for example to buy a car or for home improvements⁸. A green loan sits in that space: it is a home improvement loan where the lender defines what the money can be used for, and that definition is about energy. One credit union's green loan can be used to buy products and services that help save energy and make retrofit changes that improve a home, including energy-efficient heating controls, insulation, window and door upgrades, boiler upgrades and pipe insulation, heat pumps, solar water heaters, solar panels and rainwater harvesting equipment².

The same loan also reaches beyond the home. The eligible uses listed include electric scooters, electric bikes, standard bicycles, electric or hybrid cars and an electric car home charger². So a green loan is not strictly a home loan at every credit union: it is a loan for lower-carbon purchases, of which home energy work is the largest part. What counts is set by each credit union, so the list of eligible uses is one of the first things to check.

Green loans are a credit union alternative to a different product with a similar name: the government's Green Deal, which provided loans for energy efficiency home improvements, with the cost repaid through the electricity bill at the property over a set period⁹. The Green Deal ran as the government's flagship initiative to improve the energy efficiency of buildings between 2011 and 2015¹⁰, and its rules were quite different from a credit union loan: under the legislation, the first year's instalments on a Green Deal plan must not exceed the estimated first year savings, and the provider must agree in the energy plan to guarantee the functioning of the improvements and to repair damage caused by them¹¹. A credit union green loan has neither of those features: it is an ordinary loan repaid by you, not through your electricity bill, and the guarantee on the work sits with whoever you hire to do it.

Loan amounts: how much credit unions lend for green work

How much you can borrow depends on the credit union, and the ranges differ a lot between lenders and between nations. One credit union's green loan runs from £500 to £15,000². In Wales, credit unions have been able to offer loans at reasonable rates from as little as £50 up to £15,000³. More broadly, credit unions are known for small loans of around £50 to £3,000¹², and one consumer guide notes they offer competitive rates on personal loans of up to about £3,000⁴. A Government-commissioned study in 2013 found that credit unions offer the best value to consumers on loans up to £2,000¹³.

The pattern is that small amounts are widely available and larger amounts depend on the individual credit union. A green retrofit, such as a heat pump plus insulation, can cost more than many credit unions lend, so for bigger projects the amount available may decide whether a credit union green loan is workable at all. In Northern Ireland, an older research paper on credit union regulation recorded that loans could be made to members up to a maximum of £5,000 in excess of their share capital¹⁴, meaning a member could borrow their savings balance plus up to £5,000 more; that paper dates from 2007 and the position may have changed since.

Where savings are involved, the usual rule of thumb is that a member can borrow at least two or three times the amount held in savings, depending on the credit union's loan policy¹⁵. So a member with £1,000 in savings might expect to be able to borrow £2,000 to £3,000, subject to affordability and to that credit union's own rules. For a green loan of £10,000 or more, the credit union needs to be one of the larger lenders, and the member needs to pass its affordability checks.

The interest cap: 3% a month in Great Britain

Credit union loan interest is capped by law, and the cap has been raised twice. Before 1 June 2006, credit unions could not charge interest on loans exceeding 1% per month, inclusive of all administrative costs and other expenses¹⁶. The 2006 order increased the maximum rate from 1% to 2% per month with effect from 1 June 2006¹⁷. In December 2012 the Government published a consultation on raising the maximum interest rate credit unions could charge, from 2 per cent per month to 3 per cent per month¹⁸, and the resulting Order, the Credit Unions (Maximum Interest Rate on Loans) Order 2013, took effect from 1 April 2014, increasing the limit to 3% per month¹⁹.

The cap as it stands is 3% a month. Which? states that by law the amount of interest charged by a credit union can be no more than 3% a month⁴. A Northern Ireland Assembly briefing confirms that in Great Britain the maximum interest a credit union may charge on loans is 3% per month²¹. That monthly ceiling is a legal maximum, not the going rate: it is what the most expensive small credit union loans cost, and larger loans, including green loans, are typically priced far below it. MoneyHelper notes simply that interest rates on credit union loans are capped²².

Two things about the cap matter in practice. First, it is a legal maximum that includes the cost of the borrowing, so a credit union cannot add arrangement fees on top to reach beyond it, and one green loan advertises no fees, charges or penalties at all². Second, the cap is monthly on the balance, not a fixed rate for the life of the loan, which is why how the interest is calculated matters as much as the headline rate. The dedicated page on the maximum interest a credit union can charge covers the rules in more detail.

What you repay: fees and worked examples

Interest on credit union loans is calculated on the reducing balance. One credit union states that interest on all of its loans is calculated daily on the reducing balance of the loan², and another explains that repayments are calculated on the reducing balance, so you pay less interest with each repayment⁶. In other words, each time you make a repayment the debt shrinks, and the interest charged in the next period is charged on that smaller amount. This is how most personal loans work, and it means paying off a loan early saves interest rather than triggering a penalty.

One credit union publishes representative examples for its green loan at three borrowing sizes, which show how the cost scales with the amount²:

The examples sit on a sliding scale of APRs: a fixed APR of 21.9% for green loans between £500 and £2,999, 14.9% for loans between £3,000 and £6,999, and 8.8% for loans between £7,000 and £15,000². The pattern, smaller loans costing proportionally more than larger ones, is common across credit union lending and reflects the fixed cost of arranging a small loan. Even the highest of those APRs sits well under the legal ceiling of 42.6%⁴.

On fees, the same green loan advertises no fees, charges or penalties². That is worth checking with the credit union you apply to, because "no penalties" includes paying the loan off early: this credit union states you can pay off your loan early, make additional lump sum repayments or increase your regular repayments without a penalty⁶. The general page on what a credit union loan costs covers interest, APR and early settlement across all loan types.

Interest rebates and how repayments cut the interest

Two features of credit union borrowing can reduce the cost below the headline rate. The first is the reducing balance calculation itself: because interest is worked out daily on the reducing balance of the loan², every repayment immediately shrinks the amount interest is charged on. Compared with a flat-rate loan, where interest is charged on the original amount for the whole term, this makes a real difference to the total, and it is why the worked examples above cost less than a simple multiplication of the monthly payment might suggest.

The second is the loan interest rebate. Credit unions may also choose to pay a loan interest rebate, which is a refund of loan interest paid to all members who borrowed during the preceding financial year⁷. Not every credit union pays one, and it is discretionary rather than guaranteed, but where it exists it returns part of the interest you paid at the end of the credit union's financial year. It is a benefit of the mutual structure: surplus income is returned to the members who created it rather than paid out to outside shareholders.

Many credit unions also build saving into the repayment itself, through schemes where a small part of each repayment is set aside as savings. MoneyHelper notes that you might need to have a certain amount saved with the credit union before you can borrow²², and some credit unions ask members to build savings first²³. The result is that by the time a green loan is repaid, the member may hold savings they did not have before. The page on Save As You Borrow explains how these schemes work.

Who can get one: common bond, credit checks and documents

Membership is the gate to any credit union loan. All credit unions in the UK may only accept members who share a "common bond"⁵. The bond can be living, working, studying or volunteering in a certain area, working in the same industry or for certain employers, or belonging to the same trade union²². Citizens Advice describes it as something members all have in common, such as living or working in the same area, working for the same employer, or belonging to the same church, trade union or other association²⁴. Anyone can become a member, but you must share the common bond with the other members¹³.

Family and household members can often join too. As long as one member of a family meets the common bond requirements and has joined the credit union, the other family members living at the same address can usually join⁸, and anyone in the house of a person with a common bond can usually become a member²³. So if one person in a household qualifies through where they live or work, a partner or adult child at the same address can generally join and apply in their own name. The pages on the common bond and family members cover this in detail.

Once membership is sorted, the credit union checks affordability and identity. Some credit unions lend as soon as you become a member, while others only lend after you have saved for a set period, and affordability is checked against the money you have left after paying your bills⁸. For a first loan, a credit check is run: one green loan provider states plainly, "We will run a credit check for your first loan with us."² On documents, you will usually need to provide two recent documents to prove your identity and address, for example a passport, driving licence, student or work ID card, bus pass, birth certificate, bank statement or energy bill²².

How to apply and how quickly the money arrives

Applying starts with finding a credit union you can join, using its common bond, and then applying for membership and the loan together or one after the other. The page on finding a credit union you can join and the credit union directory list credit unions by area and employer. Once you have identified a green loan, the process is typically short: one credit union asks for some basic information and says it will be in touch within one working hour to complete the green loan application, and gives a decision within 5 working days².

What you need for the application is the evidence described above: two documents proving identity and address²², details of income and outgoings for the affordability check, and a description of the energy improvements or purchases. Because the loan is for a defined green purpose, the credit union may ask what the money is for, though the checks are about affordability and identity rather than auditing invoices in advance.

Repayment methods are flexible. Credit unions take repayments direct from wages via payroll deduction, by Direct Debit or standing order, in cash at the credit union's office or a collection point, with State benefits paid in directly, and by PayPoint cards in some places⁸. One green loan provider says its members most often find repaying through a standing order the easiest option, with payroll deduction available where the employer is one of its partners, and cash at the office also accepted². The comparison of payroll deduction or paying in yourself sets out the differences, including what your employer sees.

Green loan, ordinary loan or green mortgage borrowing

For energy improvements there are three broad ways to borrow, and they suit different circumstances. A credit union green loan is an unsecured loan: the debt is not tied to your home, the amount is limited to what the credit union lends, and the interest is capped by law at 3% a month in Great Britain²¹. An ordinary credit union home improvement loan is the same thing without the green restriction, so it can pay for a new kitchen or a repair as easily as for insulation; the green version may be priced differently because the lender has chosen to support energy work.

A green mortgage works differently. Some lenders give lower interest rates, cashback or larger loans if your home meets a minimum energy-efficiency level or you make energy-efficiency improvements²⁵. The borrowing is secured on the home, which means the amounts are far larger and the term far longer than a credit union loan, but also that the debt is tied to the property: fall behind and the home is at risk in a way it is not with an unsecured loan. Green mortgage discounts tend to be modest, and they reward the energy performance of the property rather than funding the work itself.

There are also ways to pay for energy work without borrowing from a bank or credit union at all. NS&I Green Savings Bonds are available now and contribute towards public spending²⁷, though they are a savings product for the buyer of the bond, not a source of funds for improvements. The old Green Deal route, repaid through the electricity bill, is largely closed to new plans but existing ones continue⁹. In practice, the choice tends to come down to size: a few thousand pounds of insulation or a boiler suits a credit union loan, while a whole-house retrofit costing tens of thousands is mortgage territory.

If you fall behind on repayments

Credit unions are among the more constructive lenders when payments go wrong, but they do have one power other lenders lack: access to your savings. If you miss payments on a loan, the credit union may be able to use your savings to repay the loan¹⁵. The same rule is stated across several debt advice sources²⁸, and it applies because savings and loans sit inside the same membership. If you are relying on those savings, this matters: money held with the credit union you owe may not be reachable while the arrears exist.

Before that point, credit unions can offer help. Citizens Advice lists the sort of arrangements they might make: reduce or pause your payments for a limited time, stop adding interest to the loan for a limited time, or help you work out a plan to pay what you owe²⁴. Because credit unions are not-for-profit community lenders¹, they generally prefer a repayment plan to enforcement, and speaking to them early is the practical step. The page on falling behind on a credit union loan covers the process.

Two protections are worth knowing. First, a credit union green loan is unsecured, so unlike a logbook loan there is no bill of sale over your possessions³⁰, and unlike a credit sale agreement for goods the position on repossession differs: with a credit sale, the supplier cannot repossess the goods if you fall behind with repayments³¹. With an unsecured loan, the lender's remedy is a claim for the debt, not seizure of the heat pump or the car. Second, if you borrowed for an electric car through a different route, note that with a personal loan you can sell the car at any time³², because the debt is not secured on it; the same is true of a credit union green loan used for a vehicle.

Free, impartial help with arrears is available from debt charities: StepChange, National Debtline and Citizens Advice all publish guidance on credit union loans and on dealing with lenders when you cannot pay²³, and MoneyHelper offers free support too. The debt section of this site brings together the options, from informal repayment plans to formal solutions.