How do solar loans work?

What is a solar loan?

A solar loan is a type of financing that lets you purchase solar panel systems over time — typically between 10 and 20 years. Loans are generally available as personal loans from traditional banks and online lenders or in-house financing from solar panel vendors, manufacturers and installers. Once financing is in place and the equipment is installed, you make monthly payments (much like with a traditional personal loan).

Going solar isn’t cheap (from $5,000 to $40,000 on average), but a solar loan is an accessible financing option with competitive interest rates and low upfront costs.

How much solar panels cost varies depending on several factors, including electricity needs, panels, location and available incentives — but you can expect to pay anywhere from $5,000 for a small system to $40,000 or more for a more extensive array. Depending on the lender, you may be able to finance up to 100% of the panels and installation. Most solar loans also include tax credits, which means saving on utility costs in the long run.

Kenrick of New Jersey was happy with their experience with SunPower’s solar financing: “No initial cost. Loan is paid from monthly savings on electric bill. During the summer months it generates power to the grid, which saves on the bill.”

Solar loans vs. PPAs and leases

In contrast to power purchase agreements (PPAs) and solar leases, solar financing lets you eventually own the system outright. Not only does this give you more control over the placement and maintenance of the panels; it also makes it easier to sell your house down the line without being tied to a lease. Purchasing solar panels also means you can take advantage of tax credits and other financial incentives only available to owners.

Solar loans are often preferable to other options because they can come with competitive interest rates and low upfront costs, allowing you to produce clean solar energy — and save money — right away.

Types of solar loans

There are two main types of solar loan products: secured and unsecured.

• A secured loan is often used when there’s an asset that can act as collateral — in this case, the solar panels and equipment. Secured solar loans typically come with higher borrowing limits and more competitive interest rates because they pose less risk to lenders. If you default on the loan, the financial institution or vendor can seize the panels and recoup its losses.
• An unsecured loan doesn’t require collateral but may come with higher interest rates and stricter borrower qualifications. If you default on the loan, the borrower can’t repossess the panels; instead, it has to go through the collections process.

If you have a high credit score and are otherwise qualified for a solar loan, you may qualify for a low interest rate without pledging collateral. If, on the other hand, you have a low credit score, thin credit or insufficient income, a secured loan may be the best way to qualify for solar financing.

How does a solar loan work with tax credits?

Tax credits and other incentives reduce the overall cost of buying and installing solar panels, making alternative energy more accessible. These incentives include the federal solar tax credit as well as state-specific credits.

“Taxpayers should not expect to be eligible for these federal tax credits unless their system is owned outright, is new and is installed between Jan. 1, 2017, and Dec. 31, 2034,” according to Mark Steber, chief tax information officer at Jackson Hewitt. Purchases that qualify for solar tax credits include cash purchases and those financed by solar loans, but not solar leases or PPAs.

Another tax expert, Dana Ronald, president of Tax Crisis Institute, a tax relief company, added: “The solar tax credit isn’t just for new installations; it’s also available for energy storage units like batteries that are installed simultaneously. To claim your solar tax credit, you’ll need to fill out IRS Form 5695 for the year your system was approved. Be sure to consult with a licensed accountant or tax professional to maximize any benefits available to you.”

Is a solar loan right for me?

Solar panel loans can be a great option if you want to own solar panels with minimal upfront costs. These loans are structured to let homeowners hold on to their capital by offering financing up to 100% of the price. Still, it’s essential to understand the long-term financial implications of taking out a loan before making any commitments.

Pros

• Lower upfront costs: Loans can make solar panels more accessible to financially strapped households by lowering the initial investment.
• Competitive interest rates: Because many solar loans are secured by the financed panels, interest rates may be low — often between 3.99% and 16.99%.
• Equipment ownership: In contrast to solar leases, loans let you purchase solar panels and related equipment. This means you can benefit from tax credits, and you own the equipment outright once you pay off the loan.
• Tax incentives: Only homeowners who purchase solar panels are eligible for federal tax credits that can reduce the financial burden of going green.

Cons

• Initial costs may still be high: Solar loans are an excellent way to reduce the upfront cost of solar energy, but you may still have to come up with a down payment. If you don’t have the cash available, choose a solar panel vendor or lender that doesn’t require an upfront investment.
• Increases the overall cost of solar: Installing solar panels can help you save money on your electric bill, but interest rates can cut into these savings.
• May come with strict borrower qualifications: Depending on the lender and type of financing, solar loans may come with strict borrower requirements. This is especially true for unsecured loans, where the lender assumes more risk.

Bottom line

Solar loans provide an ideal option for those who want to go solar but are on a budget. With no upfront cost and the ability to pay off the loan in installments — plus the potential benefits of tax credits and long-term usage —transitioning to solar energy is an attractive choice for many homeowners today.

It’s important to understand all the associated fees and risks before committing to a loan, though. Do your research, compare offers and speak with an accountant or tax attorney to understand the potential benefits and associated costs. As long as you take time to consider your options, a solar loan can be a great way to make an energy upgrade while keeping costs manageable.