The Definitive Guide to Solar Loans

Five years ago, leases and power purchase agreements (PPA) dominated the residential solar market. In 2013, only three banks and solar installers offered dedicated solar loan programs. But by the following year, 10 did. Today, most homeowners choose to buy their solar panels.

Buying your solar panels with a loan has a number of advantages over leasing. The primary reason is that the savings you’d enjoy under a lease are far lower than those you could reap by buying your own solar system. Loans make the most sense for people who pay income taxes, since purchasing enables you to take advantage of the 30 percent federal income tax credit on solar panels.

On top of that, leases mean you lose control of your roof. Third-party solar panel installers might position the panels in areas that are aesthetically displeasing, or they might install more panels than you want. Finally, leases can also make it difficult to sell your home, since you’ll have to either buy out the rest of the lease or find a home buyer who is willing to assume it.

To avoid these headaches, more and more people are choosing to buy their solar panels. But few people have the cash on hand to purchase solar panels outright. Fortunately, there are a variety of financing options available.

Home equity loans

Home equity loans are the most common type of loans. The reason is simple: they tend to offer the best interest rates. Through a home equity loan, you can literally cash in on your home’s value.

Equity refers to the difference between the balance owed on your mortgage and your home’s market value. If your home is valued at $200,000 and you have $100,000 remaining on your mortgage, for instance, your equity amount is $100,000. Lenders typically subtract 20 percent of the home’s value from the total equity to determine how much they are willing to loan. Using the previous example, you’d probably qualify for a home equity loan of about a loan of $60,000 (since $200,000 x 0.2 = $40,000, and $100,000 – $40,000 = $60,000). However, if your total equity is less than 20 to 25 percent of your home’s market value, you might not qualify for a home equity loan or credit line.

One of the great things about home equity loans is that they are generally tax deductible. Consult your account or a financial professional for more details about how you can deduct the loan from your taxes.

A similar financing option is the home equity line of credit. Qualifying for the home equity line of credit is the same as qualifying for a home equity loan, but you can use the money when you want without taking out the full equity amount. The line of credit stays open for a fixed time period (typically 10 years) and allows you to avoid paying interest immediately.

The downside to a home equity loan or credit line, of course, is that if you default (fail to repay), the lender or creditor can take your home. Home equity lines of credit entail added risk since they’re variable rate loans, meaning the interest rates can change after a fixed period (typically six months to a year).

Solar loans

While “solar loan” can refer broadly to any loan that enables you to finance solar panels on your home, it also has a more narrow meaning that refers to loans provided by solar installers in partnership with specialty financing firms like Mosaic, Dividend Solar, Sungage, Sunnova, or a similar firm.

Under a solar loan, the installer or the installer and a financing partner (usually a bank, credit union, or other financial institution) will offer you a loan. While the terms of individual loans vary, many solar loans offer $0 down options and repayment periods that range from 10 to 20 years.

Understanding the real cost of the loan, however, requires taking into account the upfront fees. When it comes to solar loans, those with low interest rates may not necessarily be the best option, since some of them may have high financing fees. Depending on the loan provider, these fees can range from 6 to 18 percent of the total cost of the solar system. Some of these fees might be “invisible,” bundled into the selling price of the solar system. To figure out how much an installer is adding in upfront fees, ask for a cash quote on the solar system you’re interested in, then subtract that amount from the price of the system offered through the solar loan program.

Solar loans are typically unsecured, meaning your home or solar equipment doesn’t serve as collateral for the loan. If your loan goes unpaid, the lender cannot come after your home or solar equipment.

Overall, solar loans are the second-best option for financing your solar installation, since getting a loan directly from a bank or other lending institution is likely to secure better contract terms and interest rates.

PACE loans

Property assessed clean energy (PACE) loans are loans that are paid through your property tax bill. They provide funding for homeowners and commercial building owners interested in energy efficiency upgrades and renewable energy installations-including solar power.

PACE loans are secured by a property lien, meaning your home is used as collateral against the loan. The loan itself is repaid as an increase in property taxes based on the assessed value of your home.

PACE loans don’t require credit approval, so low FICO scores won’t be an issue. But like home equity loans, you’ll need a certain amount of home equity in order to obtain a PACE loan. The amount you need varies from lender to lender.

Another similarity PACE loans have with home equity loans is that they may allow you to reduce your tax burden, as the interest paid on your loan is often deductible. PACE loans also have long repayment periods-some allow repayment over 30 years. Homeowners interested in solar power find PACE loans attractive because they require no money down and no payments for at least 6 months.

But PACE loans also have some drawbacks. Upfront financing fees associated with the loans might not be clear. Compare the price you’d pay for your solar panels with cash against the price you’d pay if you used a PACE loan. The difference between the two represents the financing fees added to the cash sale. PACE loans also put a lien on the property, so it’s important to meet your payment obligations, or your home could be at risk of foreclosure.

PACE loans are authorized by local and state governments, and are currently offered in 31 states (including Florida and California) and Washington, D.C. To find out if you could qualify for a PACE loan, contact your state or local energy authority.

Personal loans

Personal loans (sometimes called consumer loans) are usually unsecured, meaning they don’t require collateral. Like home equity loans, you can obtain personal loans from your bank, though you may also be able to get one from your credit card company. Personal loans tend to have the highest interest rates since they are unsecured. Interest payments are not usually tax deductible, and should therefore be considered only as a last resort.

Things to keep in mind: No matter what type of loan you apply for, be sure to read the terms of the loan carefully and evaluate your risk. If you don’t think you’ll be able to make the required payments, don’t take out a loan.

Your interest rate will be lowest if you’re trying to secure a loan for a solar project on a new home. The reason is that the lender assumes that if you default, the lender can collect against the value of your home, and new homes typically sell for the highest prices.

Before signing a loan agreement, shop around a bit and find out what sorts of loans are available through different lenders. Consider all your options carefully. The best loans usually have low interest rates and long repayment periods. Credit unions tend to offer the most generous interest rates and loan terms. Except for PACE loans, interest rates on solar loans vary based on your credit score, which will need to be 660 or higher in most cases.

While taking out a loan to finance your solar panels will result in significant savings, the real savings will begin after you pay off the loan, so pay a bit extra on toward your loan each month to help get it paid off.