There are many people interested in solar power, and it makes good financial sense, too. If you live in the right area of the country and have a large enough home solar array, you can completely eliminate your electric bill. Think about that: $0 every month for your electricity.
Solar panels aren’t free, though. You can expect to spend about $20,000 for a home solar system, depending on the number of panels you need. Many homeowners are still able to break even in about seven to eight years despite the high cost. But unless you have a spare $20,000 lying around, you may need to consider a solar loan to get started.
Here’s what you need to know about solar financing.
Types of Solar Loans
Some lenders offer loans dedicated to solar expenses. But you can pay for your solar system with a lot of other financing types, too, some of which may make more sense for you than solar-specific loans. Here’s a quick overview of the different ways you can finance your solar system.
Secured Solar Loans
Many solar system retailers offer point-of-sale (POS) financing in the form of secured loans— meaning you’re required to pledge collateral—which work similar to car loans. If you default on the loan, your lender can come and repossess your solar panels. On the bright side, secured loans typically come with lower rates than unsecured loans, but unsecured loans don’t require collateral.
R-PACE Solar Loans
Most loans require you to repay with personal funds. However, Residential Property Assessed Clean Energy Program (R-PACE) loans allow you to attach your loan to your house instead and pay it back over 10 to 20 years with your property tax payments. R-PACE loans are currently available in certain areas of California, Florida and Missouri.
If you sell your home, the new homeowner can take over loan payments if they like, and you’ll be off the hook since you no longer live there. Otherwise, the buyer might require you to pay off the loan before they purchase it, which can make selling your house more complicated. Besides that pitfall, this is an innovative program and one worth looking into since it also offers low interest rates.
If you’re buying a new home, you may be able to use a green mortgage to pay for a solar system. These allow you to borrow a secondary amount—based on your home’s value after the solar upgrades are made—to pay for energy-efficient upgrades with your home purchase. Some lenders even offer green refinances, which can be especially beneficial if they let you refinance for a lower rate and get funding for solar panels, too.
Solar Loans From Utilities or Local Governments
There’s a patchwork network of state and local governments across the country that offer solar loans for their residents. You can check out what loan programs (and other incentives too, like cash back rebates) are available in your area by visiting the Database of State Incentives for Renewables & Efficiency website. To find out what’s available for you, click on your state (rather than entering your ZIP code), and then select “solar” from the horizontal menu.
Home Equity Loan or Line of Credit
If you have equity in your home—the current market value of your home minus your remaining mortgage balance—you can also take out a home equity loan or a home equity line of credit (HELOC). These can come with lower rates, which is a big advantage. Keep in mind that since your home secures the loan or line of credit, you can lose your house if you default on the loan.
Unsecured Personal Loan
Unsecured personal loans aren’t necessarily the best option for solar systems because they typically come with higher rates than secured loans. However, if you default on the loan, you won’t lose any of your assets (not at first, at least). Personal loans typically have repayment terms between two and seven years.
Pros of Solar Loans
- Financing can be cheap: Some types of financing for solar loans can be very cheap, such as home equity loans or R-PACE loans.
- Better for the environment: Solar loans allow you to reduce your carbon footprint starting today.
- Increases the value of your home: A functioning solar system can provide an instant boost to your home’s value. It can also make it easier to sell if you ever plan on moving.
- Potential tax incentives: You may be able to get up to 22% of the cost of your solar system back through a federal tax credit in 2021, which will phase out in 2022 unless it’s renewed. Many states also offer similar state-specific programs.
- Allows you to save money on electric bills: Depending on how many solar panels you have and where you live, it’s possible to completely eliminate your electricity bill from your budget. Many people won’t be able to go that far, but it can lower your bill significantly. And, if you generate an excess of electricity, you may be able to sell it back to your utility company for a profit.
Cons of Solar Loans
- Decreases cost savings: Paying interest on a loan reduces the total savings you’ll get from your solar power system because it is additional money you owe on top of your loan amount.
- Extends break-even period: It takes seven to eight years to break even after buying a solar system. Paying interest on a loan can extend that horizon out further.
Should You Get a Solar Loan?
If you can’t afford to pay for a solar system in cash (and many of us can’t), there certainly are a lot of advantages to getting a solar loan so you can afford it now. That said, it’s not right for everyone.
Taking out a loan reduces the financial advantages of solar systems. Further, by the time you’ve paid off your loan, it’s entirely possible that better, more cost-effective solar panels will be available.
If you’re able to hold off and set up an automatic savings plan for yourself, you might be able to get higher-quality, more affordable solar panels in a few years because the cost of new technology is decreasing rapidly.
Other Ways to Take Advantage of Getting Solar Power
If you’re not in a position to get a solar loan right now but you still want to take advantage of solar power, you’re in luck. There are a lot of other options available. One downside, however, is that since you won’t own the solar panel directly, you won’t be able to claim any tax breaks. But you can still come out ahead financially and ethically.
Some companies will lease you solar equipment. They’ll install it on your house just as if you’d bought it yourself, but the company retains ownership and maintenance of it. You’ll essentially pay a fee to rent the equipment.
It’s a good idea to run the math to verify that even with this extra price, your overall electricity costs will, in fact, be cheaper than without the leased solar system.
Power Purchase Agreements
A power purchase agreement is similar to a solar lease in that a third-party company comes and installs a solar system on your property. However, instead of paying a fee to rent the equipment, you pay for the electricity produced by the solar panel. It’s a similar cost, just paid in a different way, like having a mini-power plant at your home.
Again, it’s a good idea to verify that the electric costs from this agreement are cheaper than your normally purchased electricity.
Community Solar Programs
Many communities are starting to offer community solar programs where you can pay to support or rent a solar panel in a large offsite solar array. In return, you’ll get a credit on your bill for the solar power your rented panel produces. These are hugely popular with people who can’t install solar systems where they live, such as homeowners with odd-shaped roofs or renters.