When considering solar panel installation for your home, you have a variety of financing options:
- Paying in full with cash
- Utilizing solar loans
- Solar lease or Power Purchase Agreement (PPA)
For the greatest long-term savings, making a cash payment is generally the most beneficial option.
If an upfront cash payment isn’t feasible, financing your solar panels with a solar loan is often a close second in terms of cost-effectiveness.
Solar loans often have the advantage of zero upfront costs, and the monthly payments can frequently be less than what you’d pay for your traditional electricity bill.
However, it’s critical to exercise caution when selecting a loan provider as multiple factors influence the terms of a solar loan, such as Annual Percentage Rate (APR), dealer fees, and potential balloon payments.
To gain a better understanding of solar loans, including how they work and what you should consider, read on in our comprehensive guide.
This guide will cover various loan providers, key features of solar loans, commonly asked questions, and other financial alternatives you may want to consider.
By arming yourself with this information, you can make a more informed decision about how to finance your transition to cleaner, renewable energy.
What Is a Solar Loan?
Taking out a loan for solar panel installation can be likened to securing a home improvement loan, a financial instrument commonly used for various household renovation projects such as deck construction, HVAC upgrades, or bathroom additions.
Like traditional home improvement loans, solar panel loans require you to borrow a specific sum from a lender, which you commit to repaying, along with interest, via monthly installments over an agreed-upon term.
A solar loan
When evaluating different solar loan offerings, consider these essential factors:
- Loan Term: This specifies the duration within which you’ll need to pay back the loan. A longer-term may result in lower monthly payments but could accumulate more interest over time.
- Interest Rate or APR: Representing the cost of borrowing, this is usually expressed as a percentage of the principal loan amount. Take note that a lower APR will make the loan less expensive in the long run.
- Fees: These are additional charges levied at the initiation of the loan, and can include origination fees, application fees, and more. Be sure to account for these when calculating the overall cost of the loan.
Principle
The principal of your solar loan is essentially the initial sum of money that the lender provides for you to purchase your solar system.
If you were to buy the solar system outright, the principal would equate to its full cost.
As you make payments over time, the remaining balance of the loan is referred to as the outstanding principal.
Making additional payments towards the principal can effectively reduce both the overall cost of the loan and the repayment period.
It’s worth noting that if you observe a difference between the quoted cash price and the financed price, this could indicate the presence of additional fees in your loan.
Such discrepancies warrant clarification from your installer, as they could affect the true cost of your loan.
Always ask for a detailed breakdown of the financing structure to fully understand the terms and any associated fees.
Financing Term
The financing term, also known as the “loan term,” “loan length,” or “loan contract,” specifies the duration of your loan or the maximum period over which you’ll make repayments.
The length of your financing term has a direct impact on several key factors, including your interest rates, your monthly payments, and the overall return on investment (ROI) for your solar panels.
To illustrate, let’s say you secure a solar loan of $40,000 and make an initial down payment of $14,000.
This reduces your principal loan amount to $26,000.
Importantly, interest will only be assessed on this reduced principal of $26,000, not the original $40,000.
This strategy will not only lower your monthly payments but also reduce the total amount of interest you’ll pay over the life of the loan.
Interest Rate and APR
Many individuals conflate interest rates with Annual Percentage Rates (APR), but they serve different roles in the context of a loan.
If you are reviewing loan documents and see both APR and interest rate percentages, it’s important to understand that the APR is typically higher because it encompasses additional loan fees and costs.
Interest Rate
The interest rate, on the other hand, is simply the cost of borrowing the principal loan amount, also expressed as a percentage.
This rate does not account for additional loan fees; it only represents the cost of borrowing the money for your solar panel system.
APR Rate
APR represents the annualized cost of borrowing and is expressed as a percentage.
It factors in not just the interest rate, but also other charges and fees involved in procuring the loan.
The APR provides a more comprehensive picture of how much the loan will actually cost you on an annual basis.
As of 2023, interest rates for unsecured solar loans, which may include dealer fees, tend to range between 2.99% and 5.99% APR.
These rates are generally more favorable than what you might encounter with other financial products like personal loans, home improvement loans, or credit cards.
Fees
When securing a solar loan, you’ll generally encounter some form of fee, such as an origination or dealer fee, and possibly closing costs.
These fees are similar to what you’d encounter with other types of loans, like home mortgages.
Origination or Dealer Fee
Also known as an initiation fee or lender fee, this charge is levied by solar lenders to cover the risk associated with issuing the loan.
There’s no standardized rate for this fee across the industry; it varies by lender and can be structured either as a flat amount or as a percentage of the total loan.
Closing Costs
These are additional expenses you might face when finalizing your solar loan.
Like origination fees, closing costs serve to offset the lender’s risk involved in closing the loan.
These fees can impact the overall cost of your solar installation and should be factored into your calculations when assessing different loan offers.
Always ask your installer or loan provider to fully disclose all associated fees so you can make a well-informed decision.
Types of Solar Loan
Solar loans come in a variety of configurations, each with its own terms and conditions.
Here are some key factors to consider as you navigate your way through choosing the optimal solar loan for your needs:
Secured vs. Unsecured Loans
Solar loans generally fall into one of two categories: secured or unsecured.
- Secured Loans: These types of loans require collateral, often your home, as a guarantee against default. This means the lender will place a lien on your property. Secured loans often come with lower interest rates because they are less risky for lenders. However, because your home serves as collateral, you run the risk of losing it if you default on the loan.
- Unsecured Loans: These loans do not require any collateral beyond the solar equipment itself. As a result, you don’t run the risk of losing your home if you default, but the interest rates are usually higher to compensate for the higher risk taken by the lender.
Key Differentiators:
- Interest Rates: Secured loans typically offer lower interest rates than unsecured loans.
- Loan Terms: Secured loans may offer longer repayment periods, potentially reducing your monthly payment.
- Risk: Secured loans come with the risk of losing your home or other collateral, while unsecured loans do not carry this risk.
- Loan Approval: Secured loans may be easier to qualify for if you have less-than-perfect credit, while unsecured loans usually require a higher credit score.
Amortized vs. Re-amortized Solar Loans
Solar loans can be either amortized or re-amortized, and each comes with its own set of advantages and disadvantages. Here’s how they differ:
Amortized Loans:
- Structure: These loans have a fixed monthly payment and term length. Every monthly payment partially covers both principal and interest. Over time, the portion of your payment that goes toward the principal increases, while the interest portion decreases.
- Advantages: Predictable payments make budgeting easier. Interest costs are spread evenly over the life of the loan.
- Common in: Secured loans are often amortized, providing stability and typically lower interest rates.
Re-amortized Loans:
- Structure: These loans require a significant lump sum payment after a predetermined period, commonly around one year. After this lump sum is paid, the remaining loan balance is recalculated, or re-amortized, and your monthly payments are adjusted, usually to a lower amount.
- Advantages: Initial lower monthly payments can make the loan more manageable in the short term. The lump sum payment can be planned for when you have additional funds available, like a tax refund or bonus.
- Common in: Unsecured loans often use re-amortization as a way to attract borrowers with the lure of lower initial payments.
Key Considerations:
- Budgeting: Amortized loans offer predictable monthly payments, whereas re-amortized loans require careful planning to ensure you can make the lump sum payment when it comes due.
- Flexibility: Re-amortized loans provide more flexibility in payment structure, but this comes at the cost of a potentially higher financial burden at the lump sum payment stage.
- Interest Costs: With amortized loans, the interest cost is generally more evenly spread out, while re-amortized loans may cost you more in interest in the long run depending on the terms and your payment behavior.
- Lump Sum: In the case of re-amortized loans, you’ll need to prepare for the lump sum payment, often by setting aside money over the first year or so of the loan.
Pros of Solar Loan
If you’re keen on owning your solar system and lack the immediate funds for an upfront payment, a solar loan’s advantages are likely to surpass its drawbacks.
Opting for a solar loan can provide you with stable, predictable electricity costs for the coming years.
Additionally, the potential to pay off the loan ahead of schedule could result in further financial savings.
Cons of Solar Loan
If your goal is to recoup your solar investment quickly, the drawbacks of a solar loan could outweigh the benefits for you.
In such a scenario, buying the system outright may be a better choice than opting for a solar lease or PPA.
Also, be aware that certain solar loans may not support the inclusion of a storage system.
3 Things You Need to Know About Solar Loans
- The solar loan amount will contribute to your total debt, potentially affecting your debt-to-income ratio, which can in turn affect your credit score.
- Solar loan for businesses (solar farm) and individuals is not the same. Businesses might qualify for larger loan amounts due to the scale of commercial solar projects compared to residential ones.
- Transferring a solar loan can be a complex process and whether it’s feasible largely depends on the terms of the loan and the policies of the lending institution.
How Long Does Solar Loan Last?
Solar loans typically have terms that last between 15 and 20 years, although 25-year loans are increasingly becoming available.
Generally speaking, it can be advantageous to spread out your payments over a period that allows your monthly loan installment to align closely with the monthly energy cost savings from your solar installation.
This approach enables you to essentially “break-even” during the early years of the loan, with the prospect of saving more as electricity rates rise.
Major solar providers such as Sunrun, SunPower, and Sunnova now offer 25-year loans that include 25-year labor and workmanship warranties.
These essentially act as long-term service agreements, with the benefit of you owning the solar panels when the term ends.
For some, these extended loan terms are a suitable option, offering the advantage of a long-term relationship with a stable company designed to last for a quarter of a century.
Others may opt for shorter loan terms to gain ownership of their solar panels more quickly. And the best choice depends on your own financial situation and priorities.
Solar Loan Alternatives
HELOC
A HELOC (Home Equity Line of Credit) offers homeowners a way to finance solar panels and other expenses.
Advantages include no dealer fees, flexibility in how the funds are used, and low interest rates comparable to current mortgage rates.
However, they can be harder to secure due to stringent credit score and home equity requirements, and may also involve more paperwork, closing costs, and additional fees.
PACE
PACE loans offer a flexible financing option for clean energy projects, requiring no minimum credit score and allowing repayment through property tax bills.
However, they have been controversial due to cases of unmanageable property tax increases.
These loans are available in a few states, such as Florida, California, and Missouri.
Solar Leases/PPAs
Solar leases and power purchase agreements (PPAs) are third-party-owned systems where the installer owns the solar panels on your roof.
You pay a monthly fee to use the panels for a fixed period, essentially replacing your utility bill with a lower lease payment.
The key difference is that lease payments are fixed, while PPA payments can vary based on solar panel output.
Conclusion: Is Solar Loan Worth It?
Paying for solar panels in cash will yield the highest long-term returns, though we recognize this isn’t a viable option for most individuals.
That said, financing solar panels can still be a worthwhile investment for many homeowners.
With a solar loan, you can enjoy the benefits of owning the system—much like you would if you paid in full—but with little to no initial outlay. It’s essentially a rent-to-own arrangement.
Key advantages of financing a solar system include:
- Little to no upfront cost
- Eligibility for federal tax credits and local incentives remains intact
- Increase in property value
While financing will mean you’ll end up paying more over time—since you’ll be covering both the cost of the system and the loan’s interest—many homeowners find that the energy savings generated by their solar panels allow them to pay off the loan in five to ten years.
