Clark says one will lend up to $50,000 at 0% “Zero. 0%” but because that loan must be repaid over a shorter term, it can create a cash flow squeeze despite the low interest rate.
“If you pay that off over the maximum five-year loan term, essentially it’s around $200 a week,” Clark says.
Other banks offer up to $80,000 at 1% for three years, which is easier from a cashflow perspective, but there’s a sting in the tail.
“The big difference … is that they’re over the standard documented loan. Yes, it’s 1% for three years – fantastic, cheap money – but you potentially could be paying for that car for 30 years.”
Adam Clark of Squirrel Mortgages says green loans may look like “free money” but can cause a cash flow squeeze despite the low interest rate. Photo / supplied
Plus, once the cheap period ends, the debt becomes subject to normal interest rates.
“You’ve paid almost nothing off. Instead of 80,000, it might be 75. It’s at 5%, 6% – whatever the rate of the day is – so it becomes a lot more expensive,” Clark says.
The intent of green loans is to either reduce home running costs or add value to the home – but borrowers can also use them to purchase an electric vehicle – a popular option while fuel prices are high.
While a car isn’t a green loan’s primary purpose, Clark says “It is the cheapest way to fund it. Bar none, it’s fantastic.”
However, he cautions against using the low rates to spend more. “This is a short-term ‘make hay while the sun shines’ opportunity,” he says.
It’s also worth being strategic about repayments. “We don’t aggressively pay down the 1% loan because that’s cheap,” Clark said. “If you’ve got a 5% two-year fixed rate, if your bank allows it, prioritise paying that off first.”
“Where you’re putting your cash flow is super, super important.”
Watch or listen to the full episode of The Prosperity Project for more.
The Prosperity Project is hosted by Nadine Higgins, an experienced broadcaster and financial adviser.
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