Is a Green Auto Loan Right for You?

This could take some of the sting out of those high price tags.

Electric and hybrid vehicles offer the promise of lower maintenance and fuel costs as well as lower emissions, but that price tag isn't always easy to swallow. The average electric vehicle cost $10,000 more than the average gas-powered vehicle in 2021, according to the Natural Resources Defense Council. That might change as electric vehicles become more commonplace, but for now, a high upfront cost is to be expected when you purchase one of these cars.

This could put them out of reach for some, but there's a little-known financing option that could make all the difference. Here's what you need to know.

Green auto loans offer special terms to buyers of green vehicles

Green auto loans are similar to conventional auto loans in many ways, but they're only available to those buying a qualifying hybrid or electric vehicle. Those who are eligible can take advantage of lower interest rates, extended repayment terms, or both, to reduce the monthly cost of financing an electric vehicle.

These loans are becoming more popular, though they're far from a common offering. A few banks have them, but you're more likely to find them with credit unions.

Each lender has its own rules that dictate which vehicles qualify and what kinds of rates and repayment terms are available. Some require that the vehicle have a SmartWay certification from the Environmental Protection Agency. This credential is awarded to the vehicle makes and models that offer the lowest emissions among their model year.

Many green auto loans charge interest rates that are at least 1% lower than what the lender charges for conventional auto loans, and some offer repayment terms as long as 84 months. Spreading your payments out over this long can increase how much you pay in interest over the course of the loan, but it will also significantly reduce your monthly payments.

How to find a green auto loan

Before shopping for any loan, it's important to do what you can to boost your credit score. All lenders use this information when calculating your interest rate because it gives them insight into how likely you are to default on your loan. A lower credit score indicates a higher risk, and lenders charge these borrowers a higher interest rate.

The next step is to find lenders that offer green auto loans. Start by looking at local credit unions and banks. You can also find some online lenders that offer green auto loans as well. Check out each of them and review their eligibility criteria, their average rates, and the quality of their customer service.

Choose a handful to get quotes from. You'll need to know the vehicle make and model you plan to purchase and the purchase price to do this. If you don't know exactly how much you'll pay for the car yet, you can make an estimate.

Try your best to complete all your applications within about a month of each other. Credit bureaus usually count multiple inquiries that take place within a short time as a single inquiry to account for normal comparison shopping behavior. But if you wait longer, you'll rack up more inquiries, which can hurt your credit score.

Once you find a lender you're happy with, you can complete the paperwork and get the cash you need to buy your vehicle. You'll make monthly payments just as you would with a conventional auto loan until you've paid off the balance.

And if you aren't able to find any green auto loans that suit you, don't be afraid to check out some conventional auto loans as well. Some offer discounts for electric vehicles that could help you qualify for an affordable rate, especially if you're bundling insurance. By exploring all your options, you'll increase your odds of scoring a great deal.