So you’ve decided that a solar panel installtion is right for your home. Maybe you even got a free solar estimate from one of our expert solar partners. Now you need to know how to pay for your solar panels. We’re here to tell you why a solar loan is the best choice, and why all other solar panel financing options pale in comparison.
Here’s a guide to the different methods of home solar panel financing, from most to least awesome:
#1: Take out a secured solar loan or HELOC
Taking out a loan for solar is like getting a small business loan for a business that’s sure to succeed. That’s because solar panels are warrantied to produce a certain amount of energy for 25 years or more, and putting them on your roof means you’ll save money for every kilowatt-hour you’re not buying from the utility company.
A secured solar loan or Home Equity Line of Credit (HELOC) takes advantage of the equity in your home to keep interest rates low. In order for a loan to be worthwhile, it needs an interest rate of around 7% or less.
Types of secured solar loans
There are many types of secured solar loans, but if you have equity in your home and a good credit score, a HELOC is probably the best way to go. You can get a rate of 5% or lower, which means lower monthly payments and more savings down the line.
The Federal Housing Authority (FHA) offers a loan called a “PowerSaver Second Mortgage” (Title 1) loan that provides up to $25,000 in financing for energy-focused retrofitting of your home. It’s subject to some additional requirements, but can also result in rates of around 5%.
Another kind of secured solar loan is called “PACE” (Property-Assessed Clean Energy). A PACE loan is basically a property tax lien against you home used to pay for solar and other energy efficiency programs (Learn more about PACE loans here).
Several other companies offer secured solar loans, but rates are often 7% or higher. In that case, it might be better to pay up front for solar or take a lease or PPA (options 3 and 4 in our list below).
The pros of a secured solar loan
Shall we compare solar loans to a sunny summer’s day? Let us count the ways!
Taking a loan for solar means you still get all the benefits of ownership while paying over time. That means the electricity savings offset some of the loan payments, and any other incentives offered by your state do as well. The best part is you can take the federal 30% solar tax credit based on the full cost of the system, but after making only a few payments. That’s a few thousand in your pocket after just 1 year.
On top of those wonderful facts, the interest paid on a secured solar loan is often tax deductible. We’re not tax experts and give no tax advice, but loans like the FHA PowerSaver and PACE loans we discussed above are covered under the federal mortgage interest deduction, as are any liens against the equity in your home.
The cons of a secured solar loan
Adding a lien against your home can make it more difficult to sell. Solar panels add value to your home, but not necessarily if they haven’t been paid for.
This is especially true of PACE loans. Some mortgage companies won’t allow buyers to purchase homes with PACE liens against them, unless the PACE lender agrees to “subordinate” the lien (make it a lower priority for repayment than the mortgage in case of default). That can be hard to accomplish, so only go PACE unless you’re prepared to stay in your home.
Another con of secured solar loans is they take time and patience to get. And lots of paperwork. Second mortgages are nearly as complex as first mortgages, so get your signin’ hand ready! Low interest rates come with some work.
Estimated financial returns of a secured solar loan
Here’s where we need an example. A good one to use is Maryland, because the state allows all kinds of solar financing and the distinctions between each are clear based on financial measures. And heck. they don’t call it “America in Miniature” for nuthin’.
Here’s how paying for solar with a secured loan shakes out in Maryland:
- A typical 5-kW solar panel system in Maryland will cost about $15,650 after the state’s $1,000 rebate. This will be the principal amount of the loan.
- The payments on a $15,650 loan at 5% interest will be about $125 per month, but the electricity savings will be about $75 per month, meaning a net cost of $50 per month or $600 per year.
- Maryland also allows solar owners to sell the SRECs their system generates, which can earn them an additional $125 this year, bringing the year 1 cost to $475.
- Here’s the kicker: the system entitles the owner to a federal tax credit of 30% of the costs after rebate, which is about $4,700, meaning the owner will come out $4,225 ahead after just 1 year.
- The electricity bill savings grow each year as the cost of electricity goes up, and continue to offset most of the loan payments over the 15-year term. Once the loan is paid off, the owner will save an average of $1,500 per year for at least 10 more years.
- The total profit at the end of the system’s 25-year warranty will be nearly $14,000. That’s a huge return for a $0-down investment!
#2: Take out an unsecured solar loan
An unsecured solar loan is a lot like a secured solar loan. Several banks and solar companies have gotten into the business of giving loans for solar installations.
The difference is the loan isn’t backed by any collateral, so rates are generally higher, terms are generally shorter, and that can mean larger monthly costs for you.
The pros of an unsecured solar loan
Unsecured loans are easier to get. You don’t have to sign your life away to put panels on your house, and you don’t need equity. Just good credit.
You might be offered a loan like this during the normal process of getting a quote for solar on you home. Many of the largest companies like SolarCity and Vivint now offer loans to their customers.
That can be a big benefit to the homeowner, because the solar companies often package other perks in with the loan. For example, SolarCity includes an extended warranty and system monitoring with its systems paid for by loan.
The cons of an unsecured solar loan
We mentioned a couple of the drawbacks of unsecured solar loans above. Rates tend to be higher—they can range from 5% to 10% based on amount and length of term. As with other financing, shorter loan term usually equals a lower rate.
Another drawback is that the interest you pay on an unsecured solar loan is not tax deductible.
Estimated financial returns of an unsecured solar loan
In June of 2016, SolarCity introduced a 10-year solar loan with an interest rate as low as 2.99%. That’s a pretty great deal if you can get it, and it provides good returns.
Compared to the 15-year loan at 5% above, you’ll end up making larger payments ($200 per month) for shorter time (10 years), but the tax credit and SREC sales are about the same.
Why an unsecured solar loan might be right for you
All in all, the secured loan is only better because of the ability to deduct interest from your taxes. If you have great credit and an aversion to paperwork, go unsecured with a big solar company. You’ll get the 30% tax credit and all other benefits of ownership, and maybe a couple perks on top.
#3: Pay for solar with cash
Paying for solar with cash used to be the only way to solar panels on your roof, and it’s still the option that allows you the most freedom. After all, once you pay for the panels, they’re yours, and you won’t have to deal with banks or solar companies after you turn them on, right?
Don’t get us wrong; there is something great about taking full ownership of a solar installation. You’re the captain of your own solar ship, and your only boundary is the sky! Maybe you just have a good reason to get rid of some of the cash you have on hand, and that’s okay, too.
The pros of paying up front
When you pay for solar with cash, you get all the benefits, including tax credits, rebates, and other incentives (like an increase in home value). On top of that, your home’s value goes up by nearly the same amount as the cost of the panels.
Paying up front can be very good for your pocketbook, too. In states where electricity is expensive, solar panels on your roof can save you thousands of dollars in year one. And once your system is connected to the grid, all you have to do is wash the panels once in a while and bask in the warm glow of electric bill savings, right? Well…
The cons of paying up front
When you pay up front for solar, you’re tying up a lot of cash. From a strictly financial point of view, taking a large amount of cash that could be invested elsewhere out of play is a bad move. That’s the idea behind Net Present Value (NPV)—money that can be used to earn a future return has move value than money that’s tied up in an asset.
On top of that, you’re responsible if something breaks or doesn’t work like it’s supposed to. Solar panels come with warranties that protect you against malfunctions and abnormal decreases in performance, but the onus is on you to chase down the manufacturer and solve those problems.
Estimated financial returns of paying up front
Here’s how paying up front for solar shakes out in Maryland:
- Installing a typical 5-kW solar system in Maryland should start at about $15,650 after the state’s generous $1,000 rebate.
- The Federal 30% tax credit is calculated based on cost after rebates, so take 30% of $16,650, for a tax credit of $4,695. That brings the first year investment down to $10,955.
- After the tax credit, subtract the first year’s energy savings, which we estimate to be $874. That reduces the cost after the first year to only $10,081.
- On top of electric bill savings, the SRECs generated by the system can be sold for $125 this year, bringing the final year 1 cost to just $9,956. That’s 40% off the starting price!
- The system will pay for itself in just 10 years, and over its 25-year life will produce a total net profit of $20,451. The internal rate of return for this investment is a stupendous 10.3%!
That’s a pretty great investment, and if you’re planning to sell your home in the next few years, the increase in home value of a fully paid-for system is an undeniable benefit.
But not everyone has thousands of dollars to spend right now, or even the right tax appetite to take advantage of the solar tax credit, so paying up front is only an amazing deal for a small subset of homeowners.
#4: Get a solar lease or PPA (third-party solar)
Solar leases and Power Purchase Agreements (PPAs) are ways for homeowners to get solar panels on their roofs for $0 down and make monthly payments. Leases and PPAs generally save people 10%-30% on their electric bills right away.
With a PPA, your solar company essentially becomes a second utility provider, only the solar electricity is sold to you at a lower rate than the fossil fuel electricity you’ve been buying from the electric company! Note: your PPA won’t eliminate your power bill from your regular electric provider, because you’ll still need energy from the grid when the sun isn’t shining. But it will save you money!
The less-popular cousin of the third-party solar family is the solar lease. It’s basically like renting your panels for a set monthly payment, and getting all the energy they produce—however much it is. Don’t get spooked by that language, though. A typical solar lease comes with energy production guarantees that will make sure you’re getting what you paid for. In fact, if you’re not offered a production guarantee with a solar lease, walk away.
The pros of third-party solar
Here’s the best part of third-party solar: whether you end up with a lease or a PPA, the installation company owns the panels and will do all the maintenance for you. Usually that means just a good cleaning every year, but if any part of that system fails, you’re off the hook! That can be a great benefit to homeowners who are risk averse.
This is also probably the easiest way to get solar. You sign the agreement and the installation company does the rest of the work. And you should save money starting on the day your panels get turned on.
The cons of third-party solar
With third-party solar, you’re giving up all the benefits of ownership. Instead of getting a big tax credit and SREC payments, the solar company does. They own the panels, and you’re just playing host to them for a little discount.
The other big kicker here is the annual cost increase. Most leases and PPAs increase by 2.9% per year, which means you’ll be paying that much more for electricity as time goes by. Utility companies have traditionally raised rates by around 3.5% per year, but if they don’t you could some day be stuck paying more than retail rates for the electricity produced by the panels.
Estimated financial returns of third-party solar
Back in Maryland, a lease will save you about $11 a month. That might not seem like a lot, but it adds up to a tidy sum over time. And because it’s so easy to start and you don’t need to do anything but kick back in a comfy chair and enjoy the savings. Here’s our estimate of the savings over time with a solar PPA in Maryland:
Why third-party solar might be right for you
If you don’t have income, you can’t take advantage of the federal solar tax credit. And if you live in a house but don’t have a lot of equity, it can be difficult to get a loan at a good rate. Third-party solar can be a good choice for you if one or both of these things are true.
#5: Go solar with a personal loan
Going solar with a loan is generally a good idea. That’s why the top 2 options above are both solar loans. But going solar with a personal loan can often turn out poorly.
The reason taking a loan for solar is a good idea is very simple: you can take the 30% federal solar tax credit and pay off that much of the loan after making only a few payments. But that’s only a benefit to you if you can get a good interest rate.
In a state that offers solar leases and PPAs (#4 on our list), paying for solar with a loan can be a bad plan if your interest rate is higher than 8% or so.
The pros of a personal loan
Taking a loan for solar is like taking a loan for a small business with a solid business plan and a steady stream of income. If your rich Uncle Morty saw that you could sell widgets for a grand and change of net profit over the next 25 years, he’d loan you money, too (and you’d be smart to take the loan).
And personal loans are pretty easy to get. If you have decent credit, banks, credit card companies, and groups like LendingTree all have options for taking out big loans; and you can have the money deposited in a few hours if you really need to.
The cons of a personal loan
The problem with an unsecured personal loan is you’re going to be hard pressed to find someone who’ll loan you the money you need for a 15-year term at a decent interest rate.
Even with excellent credit, we’re talking low credit card rates here. 11% isn’t too far off from what you might be offered. At that rate, your payments on a $15,650 loan over 15 years would be close to $200 per month. Contrast that with electric bill savings of around $75 a month, and you’ll see how that doesn’t really pencil out.
Estimated financial returns of a personal loan
Taking a loan for solar works a lot like paying up front. You still get all the benefits of ownership, including the rebate, tax credit, SREC payments and electricity bill savings. The difference is you have a loan payment for the first 15 years of the 25-year life of the panels. Here’s how it looks on a chart of cumulative returns:
Just $4,200 in profit after 25 years with a personal loan at 11% interest. Ouch. Those returns are tiny compared to what you can get when you purchase solar with cash. But paying cash is something only few people can do.
Last modified: November 1, 2018