Solar Borrowing 101: Lease vs Purchase
Virtually every homeowner considering a new solar system is confronted by the same major issue: lease or purchase. This is a complex topic which can confound even the most informed solar enthusiast. For more in-depth coverage of the different solar project financing options, check our Solar Financing Guide. In this post, we’ll be covering the essentials of what you need to know.
To begin, homeowners should understand that leasing is another form of financing. Each solar system has its unique costs based on the equipment utilized, the labor required, permitting expenses, etc. The decision to (1) purchase it for cash, (2) obtain a loan, or (3) lease it from a third party does not change those costs. These three financing options are simply ways of allocating costs and payments over time and across different interested parties in a way to make the most economic sense for all involved. This is not unlike leasing a car versus purchasing one. Some drivers prefer the payment structure of a lease and the knowledge that the car will be turned in after a fixed period of time. Other drivers prefer the thought of keeping the car for a long time, opting to purchase it instead. Different priorities, different financing structures. So, let’s take a look at how these options apply to solar financing:
First, we will consider the economics of a typical cash purchase. Assume a 5kW system costs $18,000. For starters, the homeowner will benefit from a 30% tax credit – $5,400 on this system, provided he pays at least that much in taxes (consult your tax professional). So, the out-of-pocket investment is $12,600. This system should produce around 7,900 kW hours of cost-free electricity each year. Under a typical utility rate schedule (we will use Southern California Edison as an example) the homeowner will save $1,700 starting year 1 and increasing if utility rates continue to rise. Over the life of the system, this will yield approximately 17% annualized return on his investment – in after-tax dollars. Trying earning that with your savings account! Your lifetime savings, even after considering the cost of the system, are expected to total $65,000.
Next, let’s look at a purchase of the same system using loan financing. With one of the many zero-down loans available, you can buy this system for no money down, with loan payments of $112 a month for 15 years. The system will still produce 7,900 kW hours and reduce your electric bill by $1,700 in Year 1; this amount, net of your loan payments, means you will save about $360 in the first year. Your savings over the life of the system, net of your loan payments, should total $57,000. This option is attractive because there is no out-of-pocket expense and total lifetime savings are large. However, annual savings for the first 15 years will be lower than with the cash purchase, and overall savings for the life of the system will be somewhat less.
Finally, we will consider a lease. This is a different animal altogether. For starters, you do not own the system, somebody else does. Essentially, a homeowner with a leased system on his roof has gone from paying the utility for his electricity to paying the solar company. Also, remember that $5,400 tax credit? Well, the solar company keeps that for itself. They also get to depreciate the cost of your solar system (that’s something you cannot do, in any case), saving themselves – and their investors – tax dollars. You commit to pay them a certain amount for 20 years, at the end of which they will collect their equipment from your roof. This is much how a car lease works, except you won’t get that new system excitement every 36 months. A typical lease offered by a major national installer would have you paying $99 per month for the first year. This will save you about $500 that year. But, this lease comes with what is known as an escalator – a pre-determined annual increase. In this case, the escalator of 2.9% means that by year 6 your lease will be costing you more each month than the loan discussed above. And it would keep on increasing for the subsequent 14 years! Your expected lifetime savings from the system is $23,000.
Here’s a recap of what we’ve covered:
|Cash Purchase||Purchase w/ Loan||Lease|
|No Cash Out of Pocket||?||?|
|Receive Tax Credit||?||?|
|Big First Year Savings||?|
|Big Lifetime Savings||?||?|
|Own Your Equipment||?||?|
So, when you go shopping for solar, make sure you look at your financing options. Companies offering leases will tout the low initial monthly payments. Make sure you know what the payments are going to look like down the road and ask how many years you will be locked into this plan. If you are borrowing money, make sure you understand the terms, especially clauses requiring you to apply your tax credit toward the loan in order to maintain your low payments. If all of this is a bit confusing, then make sure you have an advocate looking out for your best interest – not their own.
Here is a video breakdown of the Solar vs. Lease Option:
Want to learn more about solar loans? See Part 2 here.