Solar loans: Everything you need to know

If you're considering solar, you're likely wading through the different ways to pay for your new solar system. The options range from outright ownership by paying for your system upfront in cash to leasing your panels from the installation company – but the most common way to pay for solar is with a solar loan. Loans of any variety can be challenging to navigate, and solar loans are no exception! In this article, we'll walk you through the basics of solar financing and how to determine what solar loan might be best for you.

Disclaimer: This article is intended to provide an informational overview of solar loans for interested homeowners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a professional before making any purchase or investment decision.

Have you ever taken out a loan for a home renovation project? Solar panel loans are similar to home improvement loans, which have been used for decades to undertake projects like building a deck, upgrading an HVAC system, or adding a new bathroom. Like these other types of loans, when you borrow money from a lender to finance a solar panel system, you agree to pay it back (plus interest) in monthly installments over a fixed loan term.

Solar panel loans have the same basic considerations as other types of loans. As you compare your solar loan options, you'll want to consider all the features of the loan, including: 

• Loan term: the maximum timeline you'll make payments on the loan

• Interest rate or APR: the amount lenders charge for borrowing their money (a percentage of the initial loan amount)

• Fees: any additional charges the lender assesses at the loan initiation.

We dive deeper into these topics below but visit our solar financing glossary for even more terms.

Principal

Your principal is the initial size of your loan or the amount your lender gives you to pay for your solar system. The principal is essentially the entire cost of your solar system if you purchased it outright. As you continue to pay off your loan, your principal will be the amount that you still owe on the loan itself. You can likely make principal payments to lower the overall cost of your loan and cut down the amount of time you are paying it off. If you receive a quote with a cash price different from the financed price, that's a hint that your loan has fees. Always ask your installer to clarify discrepancies between cash and financed pricing.

Financing term

The financing term is often referred to as the "loan term," "loan length," or "loan contract," and is the length of your loan or the maximum length of time you'll be making payments. Your financing term will impact your interest rates, monthly payments, and your solar panels' return on investment (ROI).

For example, if your solar loan was $20,000 and you make an initial payment of $7,000, the total principal amount of your loan is now $13,000. You'll then only be charged interest on the $13,000 instead of the initial loan amount and pay less interest overall.

Interest rate and APR

People often confuse interest and annual percentage rates (APR). Depending on your lender and the type of loan, you may see percentages for an APR and interest rate in your loan documentation. If this is the case, the APR will usually be higher than the interest rate because it includes other loan fees.

• APR is the annual cost of getting credit, expressed as a percentage.

• Interest rate is the amount you pay to borrow from a lender in exchange for getting money to finance your solar panel system, expressed as a percentage.

Fees

You'll typically pay a solar loan fee, whether an origination/dealer fee or a closing cost. The most common fee for solar loans is an origination or dealer fee, similar to an origination fee on a home loan. Fees can be laid out as a flat amount or a percentage of your total solar loan amount.

• Origination/dealer fee: also known as an initiation fee, loan fee, or lender fee, solar lenders sometimes charge a premium to cover their lending risk. There's no industry standard dealer fee, so it'll vary depending on who is offering the loan. 

• Closing costs: occasionally, your solar loan may have closing costs listed, similar to an origination fee, in that they cover the associated risk the lender takes by closing on the loan.

Your monthly payment, interest rate, and the overall cost of your solar panels will all depend on your loan term, so it's essential to choose wisely and select a loan term that works best for your situation. The longer your loan term, the more interest you'll pay – meaning you'll pay more for solar. However, if you're interested in keeping your monthly electric expenses low and replacing your electric bill with a solar loan payment, you might want to consider a longer-term loan.

Long- or short-term loan: which should you choose?

EnergySage industry data shows that most solar loans are typically paid off in seven to nine years – this may be because a homeowner sells their home, refinances, or pays off the loan within that period. With this in mind, some homeowners choose a longer loan term to keep their monthly expenses low and pay off the loan when they have capital available (you'll want to know if your lender charges a prepayment penalty before taking this approach – read more on that later). 

It's also important to remember that you're eligible to receive the federal solar tax credit after you install your solar system, which will be 30 percent of your solar system's total cost. If you use your solar tax credit to pay off some of your loan's principal, you'll have even less to pay in the long run! Some loans are structured to consider this and adjust your payment amounts based on when you are receiving your benefit from the tax credit. You may see changes in the monthly charge. If not, you can use the lump sum from the tax credit to pay off a large portion of your loan's principal.

Should you choose the loan with the lowest interest?

Different lenders offer different interest rates, and If you've shopped for a loan for your home or car before, your eye may be trained to seek out the option with the lowest interest rate. However, while shopping for solar loans, it's important to consider all the features discussed above – not just the interest rate – to ensure you get the best deal and the loan that works best for you. 

Solar lenders sometimes use initiation or dealer fees to subsidize artificially low-interest rates for their loan products. In other words, they can charge lower interest because they charge higher fees upfront.

Dealer fees can be as high as 30 percent and are often hidden in the financed price of the loan (be sure to inspect your quotes and ask installers about differences in cash and financed prices). So even if your interest rate is low, you'll be paying 30 percent more for your solar panel system, negating any benefit you may expect from selecting a loan with a lower interest rate. We encourage you to consider the total cost of ownership of your solar panels rather than using interest rates alone to evaluate your loan options. A loan with no dealer fee may have a higher interest rate. Still, in most cases, you'll pay less for your panels overall if you select this option, mainly because solar loans are not usually held for the entire loan term (remember, most homeowners pay off their loans in seven to nine years).

Solar loans come in different packages like any other financial option, with varying structures, terms, and conditions. Let's explore what to consider when finding the right solar energy loan:

Secured vs. unsecured loans

You can categorize most solar loans into two general buckets: secured and unsecured loans. Secured loans require an asset that will serve as collateral for the loan – in most cases, that asset will be your home, and your lender will put a lien on your property. On the other hand, unsecured loans don't require any collateral other than the solar equipment itself. Here are the major differentiating factors between the two loan types:

Secured solar loans vs. unsecured solar loans

Amortized vs. re-amortized solar loans

Your solar loan will either be amortized or re-amortized – each type has benefits and drawbacks. You'll find that most secured loans are amortized, meaning you have a set monthly payment and terms. In contrast, most unsecured loans are re-amortized, which means you pay a lump sum after a certain amount of time (usually approximately one year), and then your payments reduce after that lump sum payment.

Solar loans have become increasingly accessible in recent years – and the number of banks and institutions offering solar loans continues to grow! 

If you're already getting a quote from a solar installer, they'll likely come to the table with a few different financing options. On the EnergySage Marketplace, you'll see your solar loan options when you receive solar installation quotes. Those loan options–and others you find directly–can come from a few different sources:

• Credit unions: local banks and credit unions all over the country offer energy loan products for homeowners. You can often find some of the lowest-cost, most advantageous loan options here! 

• National lending institutions: solar is growing in popularity, and big banks are jumping on board. Many now offer specialty loan products tailored to residential solar panel systems.

• Public-private partnerships: local government agencies often partner with private lenders to offer solar loans with lower interest rates and no fees.

• Utilities: some utility companies offer competitive on-bill financing programs that allow you to finance solar energy systems and repay the borrowed amount as part of your monthly electric bills.

• Municipalities: though not available in all states, some municipalities offer Property Assessed Clean Energy (PACE) solar energy financing. When you finance a system with a PACE loan, you repay it via an annual assessment on your property tax bill.

• Specialized solar lenders: many companies today specialize in–and solely provide–solar loan products. They partner with banks and a network of solar installers to offer loans.

Check out EnergySages's solar loan lending directory. If you get a solar loan quote through EnergySage, our team of Energy Advisors can help you understand your options and what you're looking at with your various offers.

Once you understand your solar loan options, you'll need to determine whether or not a solar loan is right for you – here are some of the significant advantages and disadvantages of solar loans:

Pros and cons of solar loans

Pros of solar loans

The pros of a solar loan likely outweigh the cons if you are interested in owning your solar system but do not currently have the cash for an upfront payment and want to see consistent, fixed costs for your electricity payments over the next few years. You also may end up paying off your loan early, which could end up saving you even more money!

Cons of solar loans

The cons of a solar loan may impact your decision more than the pros if you are interested in breaking even on your investment in solar as soon as possible. If this is the case, you'll want to purchase your system outright instead of going with a solar lease or PPA. Additionally, if you are interested in a solar-plus-storage system, you may not be eligible for some solar loans that do not cover storage.

Choosing the right solar loan can help you maximize your solar savings quickly. You'll want to make sure you understand all of the fees you're paying when you'll be paying them, how these fees impact your overall payment structure and payback period, and any additional costs you might need to consider as part of your loan fine print (such as any prepayment penalties that would prevent you from paying off any portion of your loan early and saving money).  

With this in mind, we created a checklist with four questions you should ask your installer or lender about your solar loan:

1. What is the difference in the cash price? 

Some installers offer a different price for cash buyers than those financing solar. Before deciding how to finance your system, it's worth asking your installer to ensure you get the most affordable deal. If you're able, you'll pay less for your system (thanks to fees and interest rates) by paying upfront in cash, allowing you to reap the benefits of your solar savings much quicker than if you financed your system. You should also factor in all available rebates and incentives that will result in a lower upfront cost. 

2. What are the interest rate and loan term?

Confirm the length of the loan and the interest rate you'll be paying. This is called out in your EnergySage quote online or in any loan paperwork if you use a lender outside of EnergySage. Ensure you understand if any changes will happen to your payments throughout the loan. Sometimes you'll see higher monthly payments outlined for the first year or so of your loan term, which is your lender taking into account the tax benefits you'll receive from the 30 percent investment tax credit.

3. What is the fee? 

Confirm the fee you're paying, whether an origination or dealer fee. Refer to our definitions of both fees earlier in this article to determine what happens when you agree to either as part of your loan. Be sure to read all of the fine print of your loan agreement because dealer fees can often be baked into the cost of your entire solar system and are not always initially apparent.

4. Are there any prepayment penalties?

Our industry data show that many solar loans are paid off earlier than the agreed-upon loan term, meaning many homeowners are prepaying their loans. Most solar loans don't have a prepayment penalty, which is a charge for making payments on the principal of your solar loan and paying off your loan early. But you'll want to ask and confirm in any loan documentation if there is one.

Can you get a solar loan with low credit?

Yes, you can get a solar loan even if your credit score is less than ideal. You may see higher monthly payments and interest rates, but an increasing number of solar loan providers are offering loans that do not have credit requirements. Learn more about going solar with low credit.

Are solar loans worth it?

In most cases, yes. A solar loan is your next best option if you cannot buy your solar system upfront in cash. You are still eligible for many of the benefits of a cash purchase, and multiple solar financing options are available.

Are solar loans tax deductible?

This depends on the type of loan you choose. All your interest payments and fees are tax deductible if you have a secured loan. However, your loan payments are not tax deductible if you have an unsecured loan. Consult with an accountant or CPA to confirm any tax deductions.

Sign up on EnergySage for free to connect with installers in your area who offer financing options or work with trusted local solar lenders. If you have questions about what solar financing suits you best, speak with your installer or lender. Through your EnergySage account, you can compare multiple quotes and financing options to go solar confidently.