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Solar Panel Financing Options: Cash, Loan, Lease

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Solar panel systems indeed have a long lifespan, often exceeding 25 years, and they offer the advantage of significantly reducing, if not entirely offsetting, your monthly electricity bills.

Considering that an average monthly electricity bill of $150 could translate to an expenditure of over $65,000 across a quarter of a century, the financial benefits of going solar become even more compelling.

However, the initial investment required for a solar setup is significant.

That’s why it’s crucial to explore various financing avenues before making the decision to go solar.

Options range from outright purchases to solar loans, leases, or power purchase agreements (PPAs).

Each has its own pros and cons, tax implications, and impact on your potential savings.

So, a comprehensive financial analysis tailored to your specific circumstances can help you make an informed decision and maximize your return on investment.

3 Solar Panel Financing Options

Three primary methods exist for financing a home solar system: paying in full with cash, securing a solar loan, or entering into a lease or power purchase agreement (PPA).

Upfront Cash Payment

Opting to pay for your solar panel system with cash undoubtedly offers the greatest long-term savings.

This approach eliminates the need for interest payments, as you would encounter with a lease or loan, and generally ensures that your electricity costs will be negligible for the duration of the system’s 25-year life expectancy.

Moreover, you become eligible for all available financial incentives, such as the Federal Solar Tax Credit, which can offset a significant portion of the initial cost.

Owning your system outright also provides a hedge against future electricity rate hikes.

Essentially, you’re locking in your electricity rate for the next couple of decades, providing a level of financial predictability that is hard to beat.

However, the primary barrier to a cash purchase is the substantial upfront investment required.

The cost of a typical residential solar panel system ranges from $20,000 to $30,000, and that’s a sizable amount to pay all at once.

Therefore, a cash purchase is most suitable for those with sufficient capital to cover the initial costs without compromising their financial stability.

Solar Loan

Using a solar loan to finance your solar panel system provides a viable alternative if you’re unable to make an upfront cash payment.

Solar loans often come with the advantage of requiring no down payment, making solar technology more accessible to a broader range of homeowners.

The end result is that you still get to own the solar panel system outright once the loan is paid off.

However, the downside to this financing method is that interest will accrue on the loan amount, adding to the overall cost of your solar panel system.

Your credit score can significantly impact the interest rates offered to you; generally, the higher your credit score, the more favorable your loan terms, and the less you’ll end up paying in the long run.

It’s essential to be judicious when deciding how much to borrow. Ideally, you should only take out a loan for the exact amount required for the solar panel system, thereby minimizing the interest payments.

Always scrutinize the terms and conditions of any loan agreement carefully.

Inattention to details such as early repayment fees or variable interest rates can result in unexpected financial burdens.

Therefore, thoroughly understanding the loan terms is key to ensuring that you choose the most cost-effective option for your circumstances.

Solar Lease or Power Purchase Agreement (PPA)

Solar leases and Power Purchase Agreements (PPAs) were instrumental in propelling the early growth of the solar industry, despite waning in popularity due to their limited financial benefits.

Both options are forms of third-party ownership (TPO), meaning a company installs and owns the solar panels on your property and sells you the electricity they produce at an agreed-upon rate.

In the past, the U.S. Department of Energy indicated that the rate for electricity under a lease or PPA should ideally be 10-30% lower than your current electricity costs.

While these agreements often used to feature an annual rate increase, or “escalator,” more recent trends have shifted toward fixed-rate contracts for the duration of the 25-year term.

A key advantage of TPO is that the leasing company takes on the responsibility for system maintenance and monitoring, although the quality of this service can vary depending on the provider.

However, there are some trade-offs.

First, because you don’t own the solar system, you’re ineligible for the various financial incentives and tax rebates designed to encourage solar adoption; those go to the system’s owner.

Secondly, while studies have shown that homes equipped with solar systems generally sell for 3-4% more, this benefit may not extend to homes with leased solar systems.

Prospective buyers may be hesitant to assume an existing solar lease or PPA, potentially making the home more challenging to sell.

Therefore, while leases and PPAs might provide a more accessible entry point to solar energy, they may not offer the same long-term financial benefits as owning your system outright or financing it through a loan.

In summary, while leases and PPAs might appear to be lower-risk options, they often result in lower financial gains and could bring additional complications.

Cash purchases and solar loans usually provide a more straightforward path to long-term savings and ownership, making them the more financially savvy choices for most homeowners.

Still don’t know which to choose? Read our solar loans vs solar leases guide.

Solar Loan vs. Lease vs. Cash Purchase

Opting for a cash purchase is advisable if:

  • You have sufficient capital to pay for the solar panel system upfront.
  • Maximizing the financial returns from your solar investment is a top priority, as a cash purchase usually yields the highest return on investment (ROI).
  • You aim to capitalize on the Federal Investment Tax Credit (ITC) and other available state or local tax incentives and rebates.
  • Full ownership of your solar system from day one is important to you.

A solar loan is a good choice if:

  • You lack the upfront capital to cover the entire cost of the solar system.
  • You still want to optimize your savings over the long term, even if the ROI is slightly reduced due to interest payments.
  • You’re keen to benefit from the ITC and other available tax incentives and rebates, as ownership allows you to qualify for these.
  • You desire to eventually own your solar system once the loan term is complete.

A solar lease or PPA could be suitable if:

  • Maximizing ROI isn’t your primary concern; rather, you’re looking for immediate cost savings on your electricity bill.
  • You’re ineligible for the ITC and other tax incentives, perhaps due to insufficient tax liability, making the ownership model less attractive.
  • You don’t have a strong preference for owning your solar system outright, either now or in the future, and are comfortable having it owned and maintained by a third party.

What’s a Good Interest Rate When Financing Solar Panels?

Securing a favorable interest rate is crucial when financing your solar panels, as it directly impacts your overall costs and savings in the long term.

Interest rates for solar loans can vary widely, generally ranging from as low as 3.99% to as high as 16.99%, although the ceiling can sometimes reach 24.99%.

Ideally, you’ll want an interest rate on the lower end of the spectrum.

A lower interest rate not only means you’ll pay less money in interest over the life of the loan but also that you can potentially pay off the loan more quickly.

The average interest rate for solar loans typically falls between 3.99% and 5.99%.

As a benchmark, aiming for an interest rate below 6% is advisable.

To secure a more favorable Annual Percentage Rate (APR), consider the following tips:

  • Check Your Credit Score: A higher credit score can generally help you get a lower interest rate.
  • Shop Around: Different lenders offer different rates. It’s beneficial to get quotes from multiple sources.
  • Consider a Shorter Loan Term: While this will increase your monthly payment, you’ll end up paying less in interest over the life of the loan.
  • Fixed vs. Variable Rates: Fixed rates are generally more stable and predictable, whereas variable rates can fluctuate and increase your financial risk.
  • Negotiate: Don’t be afraid to negotiate the interest rate with your lender, especially if you have a strong credit profile or other factors working in your favor.

By being savvy about your financing options, you can maximize the economic benefits of your solar panel system.

Solar Tax Benefits

The cost of installing solar panels can be a significant investment, but various tax incentives can help mitigate these expenses.

A primary advantage is the federal government’s solar tax credit, officially known as the Investment Tax Credit (ITC).

This incentive allows homeowners in the United States to claim a 30% tax credit on the cost of purchasing and installing solar panel systems on their main or secondary residences.

The ITC is designed to encourage the adoption of renewable energy and is set to remain in place until 2032.

However, it’s important to note that the credit amount will be reduced to 26% in 2033 and further lowered to 22% in 2034, before being phased out entirely in 2035.

State-level incentives can also contribute to cost savings.

Depending on your location, you may have access to additional perks like net metering, which enables you to earn credits on your utility bill for excess energy generated by your solar panels.

Certain states also offer sales tax exemptions for solar panel purchases, providing another avenue for financial relief.

Is Interest From Solar Loans Tax Deductible?

Yes, the interest from solar loans is often tax-deductible, offering an additional financial advantage when you opt for solar financing.

Because installing solar panels is viewed as a capital improvement to your home, the interest payments on the loan for this improvement can typically be deducted from your taxable income.

This is in line with IRS guidelines that classify interest on capital improvements as tax-deductible.

Moreover, state-level tax incentives can provide further financial relief. For example, some states offer property tax exemptions for solar installations, meaning that even though the value of your home will likely increase due to the solar installation, your property taxes won’t.

Additionally, sales tax exemptions on solar equipment in certain states can help lower the upfront costs of your solar project, potentially saving you thousands of dollars.

To navigate the complexities of these tax incentives, you may find it beneficial to consult with a tax advisor or use specialized tax software like HR Block or TurboTax.

These resources can assist you in optimizing your tax returns to get the maximum financial benefit from your solar investment.