A Guide to Solar System Financing Options
Solar energy isn't just beneficial to the planet; it can also benefit your budget. Are you looking to switch your home to a renewable energy source? Would you like to start saving money on utilities while potentially increasing the value of your home?
A typical residential solar panel system can come with a price tag starting at $15,000 and increase significantly depending on the system needed. But don't let that amount deter you from pursuing solar ownership! There are many ways to buy solar panels and fund a solar installation without a large upfront payment.
Can You Finance a Residential Solar Energy System?
Absolutely! Financing is available and can be used to purchase solar panels and pay for their installation. Let's review the options currently available to property owners who want to install home solar systems and start saving.
Which Solar Financing Option is Right for You?
If you're able to swing it, paying cash is always the best bet, but there are other ways to finance solar panels without draining your bank account.
Understanding all the different types of solar financing options is important to help you make the best and most informed choice.
An outright cash purchase will get you the biggest return on your investment, but a solar loan, solar power purchase agreement, solar lease, or other types of loans will still save you money over time.
Solar Loans
The first option available to many homeowners is a solar loan. Next to cash, these fixed-rate loans are the best option to pay for solar costs.
Like other types of loans, you'll need to submit a credit check to qualify for a solar loan. Loan amounts are based on the actual cost of the solar panels along with their installation. Be sure to get multiple bids from solar installers for the best installation price.
Some solar installers partner with a company called Mosiac to help homeowners finance their solar system. Since the contractor is already partnered with a solar financing company, that’s one less step you will have to take when seeking a loan.
A few lenders specialize in funding for renewable energy. GreenBiz and Lightstream are two companies that offer some of the best solar panel loans. Qualifications are based on your credit score and debt-to-income ratio. While many factors are used to determine eligibility, a minimum credit score of 600 is generally needed to qualify.
These unsecured loans have fixed interest rates and require little to no down payment to get started:
GreenBiz is a company dedicated to helping make properties more energy efficient. They partner with a credit union to offer applicants solar loans with a low-interest rate.
Lightstream offers unsecured solar loans with no origination fee or prepayment penalties. The minimum loan amount is $5,000, and the maximum loan amount is $100,000. Same-day loan approval and next-day funding are available.
Pros:
Higher long-term savings
Homeowner owns the equipment
Eligible for all solar incentives, tax credits, and rebates
Cons:
Paying interest decreases how much you'll be saving
Homeowner is responsible for the maintenance of the panels
Solar lease
You're probably familiar with leasing in the context of a vehicle. Leasing solar panels works exactly the same way. You make monthly payments for a fixed period of time, usually about 25 years, to a third party who owns the equipment and pays for the solar panel installation.
Once your lease term expires or you terminate the lease, the third party removes the solar panels and equipment.
Pros:
Maintenance and upkeep of the solar panels is included
Equal payments every month allow for easier budgeting
Cons:
Not eligible for solar incentives, federal tax credits or rebates
Homeowner does not own the solar panels
Can make selling your home difficult if the new owner does not want to take over the solar lease
Power Purchase Agreements
Power purchase agreements, or PPAs, are an interesting opportunity for folks looking to get solar with no down payment. Similar to a lease, the homeowner does not have ownership of the solar equipment, but the cost of the equipment and installation is covered fully.
PPAs operate most like traditional utility charges. Once installed, the homeowner is charged a set rate per kilowatt-hour (kWh) generated by the panels. The rate per kWh is agreed upon in the contract ahead of time and sometimes includes an annual escalator, meaning that the rate can go up 3-5% each year.
As you might imagine, solar panels produce varying levels of energy based on the weather and how much sun is available. Oftentimes, the longer days and brighter sun in the summer mean that charges will be higher than in the winter.
It's important to note that rates per kWh in power purchase agreements are typically less than the rate the homeowner would pay the utility company for traditional electricity. So while you're still making a variable payment per month, you're still saving money by receiving solar energy through a PPA!
Pros:
No upfront costs
Installation and maintenance of the solar panels is included
Energy costs are typically lower than regular electricity bills
Cons:
When selling your home, the buyer will either have to take over the PPA, or you may have to break the contract and pay a fee
Not eligible for solar incentives, federal tax credits, or rebates
Less predictability in monthly payments since it's based on how much energy is produced
PACE program
The Residential Property Assessed Clean Energy program (R-PACE) is a unique solar financing option for folks living in California, Florida, and Missouri. With a PACE solar loan, repayment is attached to your property tax bill, making it a secured loan. This means interest is typically lower than with an unsecured loan.
Pros:
Little to no down payment
Low-interest rates
Cons:
Not available in many states
Can make selling your home a bit more complicated
Qualifies as a tax lien and has priority over any other loan on the property, including the mortgage
Personal, Home Equity, and FHA Loans
While they aren't solar-specific, some folks may opt for a personal loan, a home equity loan, or an FHA loan to finance their solar energy system.
Home equity loans are based on the current value of your home minus what you owe on your mortgage. Because your home is used to secure the loan, you'll receive competitive interest rates, but if you cannot make the monthly loan payment, you will risk losing your home.
Unsecured personal loans typically have very high-interest rates and are not the best option for financing your solar system, but they can be used if you don't qualify for other financing options. You do not have to disclose the loan purpose to apply for a personal loan, as it can be used to finance anything you want.
FHA loans can be used to cover solar panel financing if purchasing a home or refinancing with an FHA loan.
Things to Consider When Financing Your Solar System
When considering if you will be financing your solar system or not, these are some of the top things to research before making your decision:
Where is your home located?
If you're in a part of the country with great sun exposure and a large enough solar array, you could completely eliminate electricity bills! Also, additional solar financing options and incentives are available to residents of different states.
What is the overall value of the home?
Solar panels can add value to a home if they are fully paid for. The value of your home as opposed to what you owe on it may help you decide if you should use a home equity loan.
How long do you plan to live in it?
On average, it takes around 7 or 8 years to see a return on your solar panel purchase. If you plan to move before then, you might not see your savings come to fruition.
How will adding solar panels affect the resale value or selling process?
If you plan to sell your home, the solar panel loan, lease, or PPA may need to transfer to the new owner. If they don't want to keep the panels, you may be liable for removing the equipment or paying a termination fee.
Is It Worth Getting a Loan for Solar Panels?
Solar energy is good for the planet and also good for your wallet. While solar panels cost a large amount upfront, a solar panel system will pay for itself over time. Taking out a solar panel loan can make switching to solar much easier with a monthly payment similar to your current utility bills.
Solar Financing for the Win
With great financing solutions available, residential solar energy is within reach of millions of Americans. An upfront cash purchase will save the most, but a solar panel loan is also a safe bet. Those who choose to lease solar panels or enter into a power purchase agreement to install solar panels will also save money, though they won't ever own the solar equipment outright. No matter which financing option you choose, switching to clean and renewable energy will save you money while saving the planet.
