Solar Loans – Good Debt or Bad Debt?
So you’re thinking about adding solar to your home. Awesome! One of the key questions that solar shoppers soon run into is how to finance their solar project. Many national solar installers grew their businesses by signing up customers to 20-year leases.
In fact, according to a recent Greentech Media study (GTM), 72% of all residential solar systems were financed by a third party via either a lease or power purchase agreement in 2014. As the cost of solar has come down, these long term contracts are going out of favor with homeowners. In place of leases and power purchase agreements, consumers are increasingly favoring to buy their home solar system, primarily through a solar loan.
Solar Loans vs. Solar Leases
How should consumers consider loans compared to leases? Well, a solar lease is very similar to your current utility bill. The energy will be generated on site via clean solar energy, and the customer sees some level of bill savings. But just like your normal utility-bill, you do not own the energy generator, and you are not paying off an asset. Instead, you only pay for the electricity the solar panels generate.
A solar loan provides a key differentiator from a lease, ownership. With ownership comes another major benefit, added home equity. A recent study from Lawrence Berkeley National Laboratory highlighted clear data that adding solar that is owned by the homeowner adds $4/watt of home equity to the house. So if you have a 5kW or 5,000 Watt system, that’s $20,000 of added home equity to your home.
So a solar loan can add home equity, but is it good debt, or bad debt?
Well, how are we defining good debt?
Many financial advisors encourage consumers to avoid debt in most cases or to at least evaluate whether a debt is a good debt or bad debt. In the case of solar, there is compelling evidence that solar debt is a unique case of good debt.
How Stuff Works defines good debt as: “an investment that will grow in value or generate long-term income”. Examples include a college education which will significantly increase your earning power or a mortgage for a home which will lock in your cost of living and is expected to increase in value over time.
By that same definition, solar is a very good investment. Solar.com’s Bid Generator provides estimated costs of a local PV system and total lifetime savings. That same 5kW system which typically costs less than $20,000, will save you over $50,000 over the 25-year life of the system, equal to the length of the solar panel warranties. That’s $50,000 of money not going to your utility, or even your solar lease provider, but to your own pocket, savings, retirement, vacation fund or otherwise. Add to that the $20,000 of home equity that you can capture if you sell your home anytime in the next 25 years, including tomorrow!
The most popular loan with Solar.com customers has a 12-year term, no pre-payment penalties, and interest rates of 2.99-4.99% depending on your credit score. The 12-year term is common because, for most customers, their monthly loan payment is equal to or less than their current utility bill. This makes considering solar a similar decision to renting versus buying a home. One of the primary drivers of home ownership is building personal wealth by applying mortgage payments to your loan principal outstanding as well as the long term rising value of the real estate.
With all this in mind, consumers can rest assured with a solar loan. Even if they are working an aggressive debt free plan, a solar loan is far superior to a solar lease or your current utility bill.
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