5 reasons to choose a green loan over interest free finance
You may have heard the old saying: if something sounds too good to be true, then… well, it probably is too good to be true. Unfortunately, this is often the case with interest-free loans. It may seem like you’re getting a great deal, but there’s a good chance that you’ll end up paying more than you would have with a conventional loan (or an outright purchase).
So, if you’re hoping to invest in a renewable energy product, such as solar panels or a solar heating system, it’s a good idea to be wary of interest-free offers. Here are five reasons you should consider a green loan instead.
Interest-free finance is not really free
No finance is really free. So, if a loan is advertised as interest-free, the lender is actually likely to be recouping their costs of providing you with finance by charging one or more of the following types of fees:
- Merchant fees charged to vendors (i.e. the business that sells the product or service purchased with the loan)
- Account fees charged to customers (this may include an establishment fee, monthly fees, account management fees, and statement fees)
You could end up paying a higher price with interest-free finance
To cover the costs of hefty merchant fees, vendors may increase the ‘interest-free’ price you pay for their goods and services. In other words, the amount you would usually pay as interest is simply added to the cost of the purchase itself. For example, the cash price for a solar energy system might be $5,000. However, if you apply for an interest-free loan, the price could rise to $6,000. You might not even be aware that this has happened.
Your loan is unlikely to be interest-free indefinitely
Making the minimum monthly repayments on your interest-free finance mightn’t be enough to clear your debt by the end of the interest-free period. This may leave you responsible for an outstanding amount that could generate interest rates as high as 29%, with heavy penalties for any late payments.
You may not be protected by the National Consumer Credit Act if you choose interest-free finance
The National Credit Code doesn’t apply to interest-free loans, which means that you’re not entitled to the same disclosure documents (including a full breakdown of fees and charges) as you would receive with a regular financial product. You may also be unable to access dispute resolution services such as those offered by the Australian Financial Complaints Authority (AFCA). By contrast, green loan applicants can seek recourse through various channels because loan providers must abide by the National Credit Code.
A green loan offers clear terms and competitive interest
With a green loan, you know exactly what you’re getting: a competitive interest rate with a consistent monthly repayment schedule that makes budgeting a cinch. There are no hidden charges and your interest rate won’t abruptly double without warning. Because you can access the cash price of your chosen renewable energy product, and needn’t worry about hefty merchant fees, you can even save money by choosing a green loan over interest-free finance.
It’s easy to pair green loans with government subsidies
The government has implemented a variety of schemes to encourage more Australians to invest in sustainable technologies for their homes. Often, the associated subsidies are linked to green loans. For example, the Clean Energy Finance Corporation has paired with RateSetter to administer its South Australian Home Battery Scheme. Through RateSetter, the subsidy is paid directly to the installer and you can apply for affordable finance at the same time.
This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.