Solar Borrowing 101: Loans Are Not Always What They Seem
In order to maximize the savings of a purchased solar system, homeowners have to consider various factors including price, size, and hardware. No less significant is the financing decision. There are two basic options: pay cash or obtain a loan. Solar systems typically cost $20,000 or more, and we find few customers are willing to pay the entire purchase price up front. Most elect to finance the purchase. Some homeowners will go directly to a lender with whom they have a relationship, usually obtaining a Home Equity Loan or a second mortgage. More, typically, obtain a solar loan – usually from a lender recommended by their installer. Our Solar Financing Guide provides an in-depth overview of all the options for residential solar projects.
These solar loans come in different shapes and sizes, depending on each homeowner’s preference and needs. The first thing you should know is that most solar loans allow for a homeowner to apply the federal tax credit toward paying down the loan balance. The lenders typically allow between 12 and 18 months after the funding of the loan for the homeowner to pay back up to the total amount of the tax credit (30% of the purchase price). For example, if a solar system cost $20,000 and was fully financed by a lender, the homeowner would be allowed 12-18 months to pay back up to $6,000 without any pre-payment penalties. This allows for the homeowner to have filed his federal taxes and received a refund, if any was due, and then pay down the loan balance with the proceeds of the tax credit.
So, what should you look at amongst the various solar loans available? There are two prominent considerations: (a) the true Annual Percentage Rate (APR) of the loan and (b) the monthly payments. The first of these can be tricky. Some lenders tout extremely low nominal rates (some as low as 1.89%). These sound too good to be true – and they are. Because what they don’t tell you is that there is something known as a ‘dealer fee’ embedded in the quoted price of the solar system. These dealer fees can run as high as 17%, and the homeowner is typically unaware that their system’s price has been increased to accommodate this fee. Despite its name, the dealer fee does not benefit any third party or dealer; rather, it goes right into the pocket of the lender. One prominent solar lender claims to offer a 2.99% APR on its 12-year loan. That sounds great to many borrowers, but the reality is that the effective interest rate they are paying on the true cost of the system is over 6.3%. This is more than double the advertised rate! So, be careful with dealer fees; ask your installer about them before you sign your contract.
Some solar loans are made with what is known as a “same as cash option.” This means that the lender will fund the full amount of the loan, but only collect payments based on 70% of the outstanding balance during the first year or so. This amounts to a 30% discount on your payments for the first 12-18 months. (This makes Day One savings greater than on a traditional loan.) After that point, the homeowner is expected to pay down the loan balance by the amount of the tax credit. In the example used earlier, the homeowner would receive a $20,000 loan but only pay interest on $14,000. If at the end of the 12 month grace period the homeowner fails to pay back the tax credit amount, then the lender will start charging interest on the $6,000 portion from that point forward. But be careful, some lenders will charge retroactive interest back to the first day of the loan. This can be a very unpleasant surprise!
So, we have covered dealer fees and same as cash loans. Some lenders charge a dealer fee and others offer the same as cash option, and yet others offer both those features in the same loan. There are so many different variations that it can make your head spin. Just be sure you know the specifics of the loan you are being offered and that your installer is looking out for your best interest. Read your loan documents, and do not be afraid to ask your installer questions. If you do not get satisfactory answers, call the lender directly.