Does 7.5% look like a good deal on a business loan to you?
Currently, a competitive business loan will come in at around 8% APR – so 7.5% might not sound too bad. However, when the Energy Secretary, Ed Davey, suggested that this could be the rate of interest for Green Deal loans, it prompted a lot of controversy.
According to calculations by the Labour party (which has been critical of the proposed Green Deal interest rate) if you took out a £10,000 loan over 25 years, you would have to pay back around £22,000, meaning you’d need to save £900 a year on your energy bills on to cover the cost. It’s easy to see how this could look like an unappealing prospect to many businesses.
Under the Green Deal you are protected by something called the ‘Golden Rule’ though – this means that you won’t be given a Green Deal loan if your projected energy savings will be less than your loan repayments, so you shouldn’t end up out of pocket. The loan repayments will also be part of the energy bill you get from your energy supplier.
Despite this, many people are arguing that if the government really wants to encourage people to make their homes and businesses more energy-efficient and make the Green Deal a success, then the interest rate should be set at a far lower level.
In an interesting piece for The Guardian, Damian Carrington gives us a case study from Germany, where a similar investment scheme, KfW, has helped insulate 2 million homes since 2001 and has saved 156m tonnes of carbon since 2006 (which is the equivalent of over a quarter of the UK’s total annual emissions.) The key to the success of the scheme, Carrington suggests, is very low interest rates of just 1-2%.
Would an interest rate of 7.5% be competitive enough to encourage you to take out a loan for energy efficiency improvements? Let us know your thoughts.