Solar energy has gained widespread recognition as a sustainable and cost-effective alternative to traditional power sources. With its ability to harness the sun’s energy and convert it into electricity, solar power offers a cleaner and more eco-friendly way to power our homes. However, the initial cost of installing solar panels can be a deterrent for many homeowners. This is where solar financing comes into play.
Solar financing provides homeowners with various options to make the transition to solar power more affordable. By spreading out the cost of installation over time, homeowners can reap the benefits of solar energy without the upfront financial burden.
Solar Panel Financing Options: Cash, Loans, and Leases
You have several options for paying for solar panels at home:
- Full payment by cash
- Solar loans
If you want to save the most money, it’s a good idea to pay for your solar panel system with cash. If you don’t have the money upfront, you can consider a solar loan as an option.
Solar loans can be a smart choice because they usually don’t require any initial payment, and the monthly payments are lower than what you’d pay without solar. However, it’s important to be careful and choose the right loan provider.
Solar loans depend on various factors like APR, dealer fees, and balloon payments. Wondering how they work and where to start? Check out our complete guide to solar loans, which includes information on how they work, common questions, and other loan options!
- Solar loans are a good way to pay for a solar system, giving you lower monthly payments and cutting down on electric bills.
- Before choosing a solar loan, it’s crucial to understand some key points.
- Dealer fees, also called finance charges, can be 20-40% of the solar system installation cost. These fees are added to what you need to pay.
- With solar loans, you might need to pay around 30% of the loan within 18 months from when it starts. This depends on the value of federal tax credits for solar energy.
- Popular solar lenders include Mosaic Financial, Sunlight Financial, Goodleap Financial, Dividend Financial, and Energy Loan Network.
- To make the best choice, compare quotes from different lenders and get advice from trusted financial advisors.
Solar Loans: How They Work
Solar loans have several key features that you should understand.
- Secured vs. Unsecured
- Dealer Fee (also known as Finance Charge)
- Interest Rate
- Term (Length)
- Balloon payments
- Monthly Payments
Take a look at these features in more detail:
Secured Loans vs. Unsecured Loan
Solar-specific loans, in general, are unsecured. This means they do not require collateral (such as a home). This is different from home equity loans and HELOCs.
A secured loan, on the contrary, is backed by an asset as collateral. Secured loans are usually backed either by your house or solar panels. Secured loans are not for the faint-hearted. If you fail to pay them back on time, your solar system or your home could be at risk.
Are you unsure of the difference between a secured loan and an unsecured loan for your solar project? Below are the pros and cons of each:
|Secured Loans||Unsecured Loans|
Let’s be honest, banks want to make sure they’ll get their money back. To cover the risk of not getting the full loan amount back, banks charge a fee for the dealers to set up the loan. This fee is then added to the total cost of the solar installation, becoming a part of what you have to pay.
To figure out how much this dealer’s fee is, ask the installer for two quotes: one for cash and one for financing. By comparing these quotes, you can calculate the dealer’s fee. Keep in mind, that this fee can vary depending on the agreements each solar company has with their lending partners.
Dealer fees go by different names, like “finance charges” or “buydowns.” Their goal is to keep the interest rates low during the loan period. But be cautious: dealer costs can add a lot to the overall price of a solar installation. In 2023, these fees are expected to be around 25%, though they have been as high as 40%-50%. This extra cost can reduce the return on investment for your solar purchase. Before choosing a solar loan with a dealer’s fee, it’s a good idea to talk to a financial advisor you trust.
The interest rates for solar loans are usually lower than rates for other types of loans, like personal loans, home improvement loans, and credit card loans.
Financing companies raise the dealer fee to maintain a low Annual Percentage Rate (APR). This helps the bank make a good profit while keeping a steady interest rate for homeowners.
Credit unions that provide secured solar loans don’t have a dealer fee, but their APRs are higher. For instance, Clean Energy Credit Union offers solar loans with APRs ranging from 7.49% to 8.24%.
Solar Loan Term Length
Solar loans usually last from 15 to 20 years, but nowadays, 25-year loans are becoming more common.
It’s smart to spread out payments over the years to match the average savings on energy bills from the solar installation. This way, you can “break even” on the loan in the first few years and keep saving money as electric rates go up.
Solar energy companies now offer 25-year solar loans that also come with a 25-year warranty on labor and workmanship. These are long-term agreements, making you the owner of the solar panels.
For some folks, these long-term loans make sense. It might be a good idea to pick a company you plan to stick with for a long time. But for others, choosing shorter loan terms to own their solar panels faster might be the better option. It’s all about figuring out what works best for you.
Solar Loans and Balloon Payments: How They Work With Federal Tax Credits
Solar loans work with the idea of balloon payments. Most lenders calculate monthly payments assuming the homeowner can pay back around 30 percent of the loan within 12-18 months after it starts.
This 30% payment is the federal tax credit, also known as the “Incentive Payment.” It’s crucial to understand this because the tax credit is often worth a lot, but not everyone can claim it in full before 18 months. The tax credit isn’t refundable, meaning its value is limited by the taxpayer’s tax liability.
If you owe more than your tax credit, you carry the excess to the next tax year. However, you still have to pay the entire credit as a balloon payment. This payment can be set up in different ways. Some solar loans include tax credits and re-amortize the loan after 16-18 months. If you miss the balloon payment, your monthly payment will go up.
Certain lenders offer a low- or no-interest loan for 30% of the system cost over 12-18 months.
It’s important to know if your solar loan needs a balloon repayment if you qualify for the full solar credit, and what happens if you can’t make the full payment.
Solar Loan Alternatives
Home equity loans and lines of credit, solar leases, and PPAs are some alternatives that homeowners can explore to the traditional solar loan.
Homeowners with equity in their homes can use a HELOC.
HELOCs have the benefit of not having a dealer’s fee. They also don’t demand you to pay the tax credit amount within a specific time. The interest rates are low, similar to current mortgage rates. Plus, a HELOC can finance more than just solar panels.
However, getting a HELOC is relatively tough. The requirements are stricter, needing equity, more paperwork, and possibly other fees.
The PACE loan, short for Property-Assessed Clean Energy Financing, is a newer type of loan. It’s designed to be flexible for low-income borrowers and doesn’t need a minimum credit score.
However, PACE loans have stirred up some controversy. Some homeowners who’ve taken out a PACE loan ended up facing financial difficulties because of the high property taxes they couldn’t manage. Before making a decision, it’s crucial to do thorough research.
You can find PACE programs in Florida, California, and Missouri.
Solar leasing and power purchase agreements (PPAs), also called third-party-owned systems, operate much like leasing a vehicle. With solar leases or PPAs, you don’t own the solar panels on your roof – the installer does.
You pay a monthly fee to the company to use their solar panels for an agreed period. Essentially, you trade your monthly utility bill for a smaller lease payment while supporting clean and efficient solar energy.
In a PPA, your monthly payments might vary based on how much energy your solar panels generate.
Solar Loan FAQs
Solar loans are often a source of confusion for many people.
Q: Are Solar Loans Subject to a Downpayment?
A: Most solar loans don’t need a downpayment, but they come with a finance fee or dealer fees added to the principal.
Some lenders provide two types of loans: one spreading 70% of the system cost over several years (usually 10 to 20), and the other needing repayment within 12 to 18 months. The second loan is linked to the federal tax credit for solar energy, allowing homeowners to get a 30% tax credit for installing the system.
Q: Can a Solar Loan Be Considered a Second Mortgage or a Home Equity Line of Credit?
A: Even though a solar loan isn’t like a second mortgage, some lenders might file a UCC-1 on the solar installation (from the Uniform Commercial Code). This UCC-1 lien is public information and safeguards the lender if there’s a default.
UCC-1 filings might create confusion for mortgage lenders. When homeowners try to refinance their mortgage or sell the home, these lenders may see the filing as a lien. You can ask the lender to show proof that the solar system is their only interest in the property.
Q: Can I Pay Back a Solar Loan Earlier?
A: Nearly all solar loans don’t have prepayment penalties, meaning you can pay them off anytime. Just reach out to your lender to get a quote for the payoff. Many folks decide to clear their solar loans when refinancing, rolling the remaining loan cost into a new home mortgage.
Q: What Credit Score Is Required to Qualify?
A: Typically, most solar loans need a minimum credit score of 580. While some solar lenders might say there’s no minimum credit requirement, others might set a limit on buyers’ credit scores or charge a filing fee based on their credit score. Having a better credit score can help buyers qualify for lower interest rates on certain solar loans.
Bottom Line: Is Solar Financing a Smart Idea?
Solar panels can be bought using loans, putting you in a positive cash flow position right from the start. Make sure the monthly payment is the same or less than what you expect to save each month.
However, be careful with your money. Some solar lenders or installers might set system prices so that monthly payments are close to your expected energy bill savings. If you pay cash or buy in an area with lower electricity prices, the solar system’s cost can be much higher.
Look for a solar loan with a fair interest rate and a reasonable dealer fee. Remember, a higher fee usually means a lower rate. It’s a good idea to explore different financing options. ESD Solar suggests getting at least three quotes to compare. Contact us now!
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