Solar Loans: Financing Rates, Loan Terms, and More

There’s more than one way to acquire rooftop solar. If you can’t pay cash, financing a system with a solar loan provides a key differentiator from a lease: ownership.

With solar ownership comes the major benefit of added home equity. A massive study led by the 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.

Financing with a solar loan is very common nowadays. In this article, we’ll cover what to expect with solar loans, from interest rates to loan terms to loan providers.

Rather speak to an Energy Advisor about solar loans? Get started here.

Solar Financing 101: What You Need to Know About Solar Loans

In order to maximize the savings potential of a solar system, homeowners have to consider various factors including price, size, hardware, and how they’re paying for the it.

There are two basic options to buy solar: pay cash or obtain a loan. Solar systems typically cost $20,000 or more, and not all customers are willing to pay the entire purchase price up front. Those that don’t pay cash tend to get a solar loan instead.

Our Solar Financing Guide provides an in-depth overview of all the options for residential solar projects.

You can apply your federal tax credit to your solar loan

The first thing you should know is that most solar loans allow for a homeowner to apply the 30% federal solar tax credit toward paying down the loan balance.

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 (worth up to 30% of the total 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 homeowners to claim the tax credit in their federal taxes, and then pay down the loan balance with the proceeds of the tax credit.

“Same as cash” options

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 and makes Day One savings greater than on a traditional loan.

After the 12-18 months is over, 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!

Solar loan interest rates aren’t always what they seem

So, what should you look at amongst the various solar loans available? There are two prominent considerations:

  1. The true Annual Percentage Rate (APR) of the loan
  2. 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% — more than double the advertised rate!

So, be careful with dealer fees; ask your installer about them before you sign your contract.

How Long Are Solar Panel Loans?

Let’s talk about the solar loan terms — also known as maturities — typically available in the market.

On the short end, you will find 5 year loans, not unlike many car loans. At the long end, there are several 20 year maturities and even a few 25 year solar loans, looking more akin to a home mortgage.

There are numerous offerings in between these extremes. So, how to decide amongst all these options?

Solar loan terms, interest rates, and monthly payments

For starters, it should be understood that short-term loans have lower interest rates than long-term loans. A typical 5-year solar loan may have an effective APR in the 6% range, while a 20-year solar loan will have rates closer to 8%.

It doesn’t seem like a huge difference, but over the course of the respective loans’ lifetimes you might end up paying $12,000 more interest on the 20 year loan on a typical system.

So why not simply opt for the shorter term loan?

The reason is simple: the longer the term, the more time the borrower has to pay down the principal balance of the loan. This allows for lower monthly payments, a feature many people find attractive.

Table 1 below illustrates this dynamic, using actual loan offering from lenders active in the residential solar market. (Assumes purchase of a $20,000 solar system.)

Solar Loans Maturities Table

Long-term versus short-term savings

They key question for picking the right solar loan for you is, “When do I want my savings to kick in?”

The 8-year loan featured above has a fairly low lifetime interest cost, and therefore more long-term savings, but the monthly payment will probably not allow for immediate savings on the solar system. That is, the solar system’s monthly payment may actually be higher than the electricity cost which it eliminates.

Some people find this to be unattractive, and opt for a longer-term solar loan with a lower payment. But for a borrower taking a long-term view, the shorter term loan may actually be the best option because at the end of 8 years he or she will be paying zero for solar, with 100% of the electric savings staying in his pocket.

Since solar systems generally have an expected life of 25 years (or longer), that’s at least 17 years of free energy and bill savings generated by the panels.

However, if your goal is to maximize cash savings from the moment your system is turned on, then the 20-year loan makes more sense.

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.

If you compare solar quotes using solar.com, a trained Energy Advisor will help you compare and line up a solar loan that fits your needs.

Is Solar Financing Good Debt or Bad Debt?

Some financial advisors encourage consumers to avoid debt, or to at least evaluate whether a debt is 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 can save you over $50,000 over the 25-year life of the 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 for 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.

This long-term savings makes considering solar a similar decision to renting versus buying a home. One of the primary drivers of wealth in the US is accruing home equity with regular mortgage payments. Solar adds to that home equity and saves on energy costs.

With this in mind, a solar loan is far superior to a solar lease or your current utility bill.

Brief History of Solar Loans

The first homes to install modern photovoltaics were in the 1960s. These early adopters were pioneers in alternative home energy. They took a risk installing new technology. Costs were high and paid in cash.

Lucky for them, their financial investment paid off. Those sturdy panels are still producing to this day.

Since then, the industry has grown and evolved. The solar financing industry has grown parallel to the mass adoption of home solar systems. As more people are looking into alternative energy options for their homes, more financial institutions are seeing opportunity.

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Over the years, trends in solar financing have come and gone.

In the early 2010’s, the prevalence of Leases (also known as Power Purchase Agreements) rose to prominence. The solar installation company owned the solar system and simply sold the power to the homeowner at a lower rate than their current utility.

This was a great way to have solar on your home without any initial cash outlay. Additionally, homeowners could see immediate monthly savings making it appealing to many.

However, solar leasees are not able to take advantage of the 30% Federal Incentive Tax Credit (ITC). Only those who purchase and own the system can receive that credit. This reality has led to a decline in leases and PPAs over the last two years.

Financial institutions saw an opportunity in this coverage gap. They could finance the purchase of a photovoltaic system entirely, and allow homeowners to take advantage of the Federal ITC. For many solar-minded homeowners, this is the best of both worlds.

Affordable Solar Loan Options

In the current solar market, there are many new solar financing options available. There are options for those with low credit scores, those with some cash to put down, those who want to pay off their loan quickly, those who want a greater immediate savings, etc.

Here’s a solid foundation for the available solar funding options out there. Check out our comprehensive guide on how to finance solar panel installations.

PACE Solar Loans

In the U.S. today, there is a government program called PACE (Property Assessed Clean Energy).

PACE makes solar more accessible to lower income or credit challenged households by allowing homeowners to use their home as collateral to finance their solar system.

Note, finance rates are higher for this type of loan. Therefore, it is typically not a good option unless all other routes have been exhausted.

If your debt to income ratio is not optimal, a PACE loan might be the right choice to go solar. PACE financing still pencils out for many homeowners with sky high utility bills.

One main benefit of financing through PACE is that, should the home be sold, the balance of the solar loan transfers to the new homeowner. It is a relatively simple process for both the seller and buyer.

According to the Department of Energy, there are PACE programs in:

  1. California (10)
  2. Florida (4)
  3. Missouri (3)

For a more traditional loan – where your house is not used as collateral – there are three separate options: re-amortized loans, combo loans, and SREC loans.

Re-amortizing Solar Loans

Re-amortizing loans are independently financed through a financial institution. This loan type allows a homeowner to re-amortize (a fancy word for refinance) their loan once.

Most homeowners use their tax credit amount to re-amortize the loan at tax season the following year. However, a homeowner does not have to re-amortize with their tax credit. Technically, this loan option can be re-amortized whenever and with any amount of money.

A typical lien is not placed on the home. Home liens can be a problem for some homeowners. Rather, a UCC1 fixture filing is placed on the solar system itself to secure the loan. This is often viewed as a safer, more prudent alternative to a home lien.

Examples of Re-amortizing Solar Loan Financiers:

  1. Matador
  2. San Diego Metro Credit Union

Combo Solar Loans

Much like re-amortizing loans, combo loans are independently financed. The main difference from re-amortizing a single loan is that there are two separate loans.

The first loan is for 70% of the contract price, which has an interest rate (for which the homeowner qualifies). The second loan covers the remaining 30% of the contract price.

This second loan is meant to equal the federal tax credit amount and typically lasts for 18 months with 0% interest. If this amount is not paid off in that allotted time frame, the balance adopts the same APR as the first loan, whatever that may be.

Image result for mosaic credit union logoThe main advantage to a combo loan is that the homeowner starts off with a lower monthly payment as compared to a re-amortizing loan. This can be helpful for homeowners where consistent solar loan payments are helpful for budgeting purposes.

Examples of combo loan financiers:

  1. Energy Loan Network 
  2. Mosaic
  3. Sunlight

SREC Compatible Loans

For homeowners in a few U.S. states, there is a special program for which they are eligible.

When the solar system generates 1 MWh (1,000 kWh), one Solar Renewable Energy Credit (SREC) is created. In each state with the program, these credits can be sold on their state’s open SREC market. They are regionally specific and only available in a handful of states.

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SREC Compatible Loans are those that take these credits into account when financing the cost of the system. These financiers offer two options for how SRECs are calculated into the loan offering.

The homeowner can choose either a complete upfront buyout for the value of the SRECs (lump sum), or an offer for a ‘fixed monthly product’. In this second option, the financier spreads the value of the solar system’s SRECs over the duration of the loan.

Much like the combo loan option, these options provide the homeowner with a consistent monthly payment that does not change over time. It is helpful for those on a restricted budget or those who strongly prefer consistent payments each month.

Examples of SREC Compatible Financiers:

  1. Sungage Financial 

The Bottom Line

Going solar is a major investment with a significant long-term return. If you can’t pay cash for solar, there are solar loans to help you start saving.

Everyone’s solar financing goals and needs are different — the trick is to find the product that best serves you.

Work with a solar.com Energy Advisor to get multiple solar quotes and find the right solar loan for you.