Solar Leases vs. Solar Loans vs. Solar PPAs
So, you’ve decided to go solar – fantastic! The easy part is done. But do you know how you’re going to pay for it?
Here’s a brief overview of the main ways to finance your project. Check out our Solar Financing Guide for an in-depth read on all of the solar project financing options.
When you switch to solar, there are two separate financing paths – buying or leasing. A solar system can either be purchased with cash (outright) or through a loan. If renting is more appealing, you can lease the system, or enter a “PPA” (power purchase agreement) wherein you get a new rate of electricity (kWh/$) instead of the one the utility gives you (more on this later).
For most customers, the purchase option makes the most financial sense. The primary reason is that this is the financing method required to qualify for the federal tax credit (ITC), and receive a tax credit worth 30% of the gross system cost. The purchasing option has two sub-options: cash (outright) purchase or a loan.
Purchasing a Solar System With Cash
The cash purchase option will save you the most in the long run, as you’ll avoid costly interest or escalator fees. However, this option will have a rather large cash outlay and therefore presents you with an opportunity cost. If you don’t have this amount in a savings account, many homeowners choose to do a HELOC (Home equity line of credit) and fund the project this way.
If you are choosing to finance through a cash purchase, your installer will set up progress payments, or benchmarks during the project when predetermined amounts are due to the installer. This varies wildly from installer to installer, with some of the larger companies requiring most of the system paid for before construction even begins!
At Solar.com, there are 4 progress payments for a cash purchase:
- “Down Payment/Deposit” – $1,000 is typically due by the time your site visit is completed
- “Due Upon Approval of Site Designs” – $2,000 is due when you approve your ‘final site designs’ from the installer
- “Due Upon Delivery of Materials” – 60% of the remaining balance is due either when the equipment is delivered to you, or on the first day of installation
- “Due Upon Final Building Inspection – the rest of the remaining balance is due once your project passes city building inspection.
Purchasing Your Panels With A Solar Loan
A cash purchase is not in the cards for every homeowner, which is why a loan is your next best option. Almost every loan option will come with a ‘dealer fee’ which is the financier’s cut of the project (money isn’t free).
However, almost every loan option will advertise that it is a “$0 Down” loan, meaning not a dime is due until your first monthly payment. Interest rates vary wildly, so be sure to check what APR you qualify for with that specific financier. Solar.com works with multiple financing partners and will assist the homeowner through this process.
Our top-rated financier in California, which we model loan options on our website, is Matadors Community Credit Union (MCCU)
- They have the lowest contractor fees in CA
- They allow a one-time re-amortization option, (which most customers use their tax credit allotment for this)
- MCCU has no prepayment penalties on the loan
- They have the lowest interest rate for a 12-year solar loan.
Other companies that we would recommend, depending on certain qualifications are:
- Energy Loan Network
- Sungage Financial
- San Diego Metropolitan Credit Union
- Puget Sound Community Credit Union
- GreenStreet Lending
- Spruce Finance
- Among many other nationwide solar financiers.
These other loan options have some perks but tend to be regional banks and not the best overall option. MCCU is a statewide CA lender with the lowest rates on average. Plus, no repayment penalties and zero down. Kind of a no-brainer if you’re NOT doing a cash purchase.
There are similar loan options to MCCU in different regions throughout the country. Through Solar.com’s process, you’ll be confident you are connected to the best financing option in your area.
Leasing Solar Panels With a Fixed Monthly Lease
If taking on some debt is also not in the cards for you, renting is your last option. You can rent a solar system on your roof for 20 years through a typical fixed monthly lease, or through a PPA. Both options are likely to have an ‘escalator’ rate or a percentage by which the initial rate will increase every year.
This escalator rate can range from 0%-4% per year. Six years ago, leasing was the solar industry standard and allowed many homeowners to go solar while saving a few bucks a month on utility costs. However, this model is going out of style. The drawback of leasing is that every month your lease payment is exactly the same. Since solar production varies seasonally, this means that some months you’ll pay more than you would have if you simply stayed with your utility.
Leasing Solar Panels With a PPA (Power Purchase Agreement)
A recent development in the solar financing industry was the creation of a Power Purchase Agreement, wherein a financier finances the installation, and the homeowner pays them in return over 20 years through a new kWh/$ payment structure. Therefore, you would only be paying for the energy that is actually produced monthly by your system, and your monthly payment to the financier will fluctuate month-to-month.
In this PPA scenario, the homeowner is eliminating a tiered structure and replacing it with a new, single rate. PPAs almost always have an escalator rate increase as part of the Agreement. This means that a rate could increase at the start of the new year for the duration of the rental. For instance, if you started out in Year One with a PPA rate of $0.15/kWh and an escalator of 2%, by year 5, your rate is $0.1612.
Leasing Solar Panels or Buying Solar Panels?
Buying is almost always the way to go. If you have enough savings or a HELOC, the cash purchase will save you the most over time, as it has the shortest payback period of any financing option. In lieu of this, a loan is a great option, as many financiers have created special solar loan options. All in all, go solar, save yourself some money, help the environment, and become the owner of your home’s power source.