The scheme will see the loans tied to the house where the eco-measures are installed, so they can be paid back over a long enough period that the savings on energy bills outweigh the payback costs.
The Pay As You Save programme aims to overcome the financial barriers - such as upfront costs - people face in trying to make their homes greener and more energy efficient.
It forms part of a strategy to cut greenhouse gas emissions from housing by 29% by 2020, which the Government says will also reduce energy bills for householders and boost jobs.
Some 65,000 jobs could be needed in the green homes industry by 2020, ranging from installation and manufacturing of technology including small scale renewables to providing home energy advice.
Officials said there would also be advantages for householders. Installing some measures such as solid wall insulation could cut energy bills by an average of £380 a year.
Under the Pay As You Save scheme, householders would pay back loans in instalments which would be lower than the savings they made from the energy efficiency measures.
With people moving house on average every nine to 12 years, the payback period may not be long enough to allow people to pay back the loans at a rate where they save more than they spend.
So legislation will be introduced to allow the green loans to be tied to the property instead of the person who takes it out.
The strategy, which includes the green loans scheme, aims to improve the energy efficiency of the UK's housing stock - which accounts for a quarter of the country's greenhouse emissions.
Under the plans, some six million homes will be insulated by 2011, all lofts and cavity walls where it is practical to do so will be insulated by 2015 and seven million "eco-upgrades" will be offered to householders by 2020.
All homes will have smart meters by the end of the decade and all social tenants will receive free energy upgrades on their homes from power companies - which could see bills cut by £300 a year.
The new Warm Homes, Greener Homes strategy also proposes an overhaul of Energy Performance Certificates to help people understand how to make their homes more energy-efficient.
Home-owners will even be able to do a "virtual green makeover" on their properties online before taking action.
The Government will also consult on setting minimum energy efficiency standards for rented properties, to help tenants left paying high energy bills in draughty, inefficient homes where landlords have no incentive to improve them.
The Carbon Emissions Reduction Target (Cert) programme - under which energy companies are obliged to help householders with energy-saving measures - will be replaced by an alliance of power firms and local authorities.
Under the more local scheme, efforts to improve the energy efficiency of homes will target the poorest first, ministers said.
And £2.5 million will go to providing a network of lived-in green show homes across England, to show people what a refurbished home is like and what technology is available to improve houses.
Energy and Climate Change Secretary Ed Miliband said: "The Warm Homes, Greener Homes strategy will remove the deterrent of upfront costs and reduce the hassle of moving to greener living.
"Making homes more energy-efficient will help protect people from upward pressure on bills, tackle climate change and make us less reliant on imported energy.
"New 'pay as you save' green finance, a new alliance between energy companies and local authorities to help people in their communities, as well as moves to encourage landlords to stop ignoring energy wastage in their properties, will help deliver the radical transformation that's necessary."
Liberal Democrat energy spokesman Simon Hughes said: "It is staggering that it has taken this Government nearly 13 years to come up with plans to green our homes and cut people's fuel bills.
"Refurbishing our homes should be a win-win situation, but Labour has bungled this kind of thing before.
"Today's announcement will leave millions of families without the warm homes they need for up to 20 years.
"We urgently need a nationwide scheme to make every home a warm home."
Nick Folland of B&Q, which is already taking part in a pay as you save pilot scheme with Sutton Council for up to 100 homes in the London borough, said the trials would provide key lessons for the Government's strategy.
He said: "With more than a third of carbon emissions coming from existing building stock, if we are to meet our stretching carbon reduction targets as a nation, it is imperative that Government sets out a clear structure as to how funding and action in our homes takes place."
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