The EU will raise the money on the international capital markets and will cover the interest costs.
European ministers on Tuesday approved a Commission proposal to provide an additional €1 billion in assistance to Ukraine.
The new macro-financial assistance (MFA) adds to the €1.2 billion already given earlier this year and will be issued as a long-term loan.
It is intended to address the immediate and most urgent funding needs of Ukraine and to ensure the Ukrainian state can continue to perform its most critical functions.
Zbyněk Stanjura, Minister of Finance of Czechia, which currently holds the rotating six-month presidency of the European Council, said in a statement that "the continuation of material and financial aid is not an option, but our duty."
"Therefore, I am very pleased that we have fast-tracked the decision to provide €1 billion of macro-financial assistance," he added.
The EU will raise the money through international capital markets with a long maturity and transfer it to Ukraine on the same terms. Brussels will also cover the interest costs and back the loan with funds from its budget.
The decision by finance ministers during their Ecofin meeting in Brussels was welcomed by Commission President Ursula von der Leyen, who said the money should be disbursed to Ukraine "this month."
The funds are meant to be the first tranche of a €9 billion MFA package proposed by the Commission in May and endorsed by EU leaders at a Council summit in late June.
But Germany is reportedly blocking the package, arguing against providing loans with money raised on international markets, which the EU only started doing collectively in response to the COVID-19 pandemic.
Berlin is instead calling for the bloc to give the war-torn country grants and last month signed an agreement to provide Kyiv with €1 billion in grants.