Solar loan dealer fees explained
There are many solar financing companies ready to loan you money so you can install solar panels on your home. Unfortunately, hidden fees may jack up the price by as much as 30%. Worse: it's hard to know what these fees are.
Installing solar panels on your home is typically a five-figure purchase, so a majority of people take on financing to pay for it.
It’s often easiest to get financing directly from your solar installer. The installer will give you a solar installation proposal with a financed price, and you won’t have to deal with your bank or any other lending institution. Simple, right?
While this is undoubtedly an easy way to go, it comes with one big pitfall: it’s often hard to know what this will cost you. This is because of dealer fees. The dealer fee is a financing fee charged not to the customer, but to the solar installer.
The solar installer will pass this onto the customer, so in practical terms it’s an additional fee that you’re paying directly to the lender - similar to an origination fee with other types of loans.
Some solar loan companies make it hard to know that you’re paying a dealer fee or how much it is, making this a bad deal for a consumers. Fortunately, there is something you can do about it.
How does a solar loan work?
If you work with a solar installer and tell them that you need financing, they’ll reach out to a financing partner they work with and help you secure the loan.
Once you’re qualified for financing, your home solar proposal will contain details of the system they plan to install on your home. Instead of a bottom line price, you will see a monthly loan amount that you will pay every month until the loan principal is paid off. (Often that will be 20 years.)
There will be some financing-related paperwork you will receive and sign before executing the final contract, but by going through the solar installer, you avoid the extra step of finding a financing company and going through the loan application yourself. This is a lot like getting an auto loan through a dealership.
What is a dealer fee with a solar loan?
If you’ve ever gotten a mortgage, you might be familiar with an origination fee. This is a fee that the lender charges you for executing the loan. It’s basically a piece of revenue that the lender bakes into every loan.
A dealer fee is similar, except that the lender charges it to the solar installer. Remember that with a solar loan you obtain through an installer, it’s the installer who works with the lender. Because of this, the fee is charged to the installer.
However, in almost all cases, the solar installer will pass that fee directly onto the customer. The residential solar industry is competitive, so dealer fees aren’t something that most solar installers can absorb. Instead, they will pass it onto the customer in the form of a higher price.
How much are dealer fees?
Solar customers often have no idea how much of a dealer fee they are being charged. In fact, some lenders have been known to discourage solar installers from discussing dealer fees at all.
However, according to some sources, dealer fees can be more than 30%.
This is staggeringly high: imagine buying a $30,000 car, but the financing company adds $10,000 to the sticker price on top of that.
That doesn’t even include the interest on top of the principal. This means you can easily pay 50% more for your solar panels simply because you chose to finance your system from a solar loan company.
The Truth-in-Lending Disclosure helps, but not completely
The Consumer Financial Protection Bureau, a federal government agency, mandates that loan applicants receive disclosures on important terms of the loan. These include the annual percentage rate (APR), finance charges, and the total payments the borrower will have made over the duration of the loan. Every borrower will receive this information on a standard document known as the Truth-in-Lending Disclosure (TILA).
Normally, origination fees will be disclosed on the TILA. Unfortunately, because the dealer fee is charged to the dealer and not the solar customer, it does not have to appear on the TILA. This loophole is another way that solar loan companies try to hide the true cost of their loan products.
How can you find out what the dealer fee is?
One way is to ask, but that won’t always work because, as mentioned above, the solar installer’s agreement with their financing partner might not permit them to disclose this information.
The easiest way to find out what the dealer fee is? Ask your installer for a cash price, without any financing. It’s a good idea to do this first, and then ask them about financing offers as a follow-up. You want to make sure that there’s no chance of the quoted price being “tainted” by any loan-related fees.
The cash-only price for a home solar system is the “real price”. Once you have that in hand, go ahead and ask your installer if they have any financing deals they can offer you. Unless they’re a very small company, they’ll probably have an existing partnership with a lender and will be able to help you apply for financing.
Your financed proposal will probably look very similar to the cash proposal, but will have the key details of the loan such as the APR, the monthly payments, and the loan duration.
Chances are that you won’t get a copy of the Truth-in-Lending disclosure right away. If not, go ahead and ask for it. (Remember: a lender is legally obligated to provide this before you sign on the dotted line.) Here’s an example of what it will look like:
(That’s just a partial capture. See the consumerfinance.gov link above for a complete example.)
See the Amount Financed section, which I’ve highlighted here in red? To find out how much your financing fees are, subtract your cash price from the Amount Financed price.
If it’s zero? Great! Any amount more than zero is due to hidden financing charges. Sneaky, huh?
The Finance Charge section of the TILA is the amount you’ll pay due to the APR rate over the full duration of the loan. You can use a spreadsheet or loan calculator to double check this number.
One reason why dealer fees might not be quite as bad as they seem
I’ve spent a lot of time lambasting dealer fees associated with solar loans, and for good reason. However, one important point to know is that they are not quite as terrible as their high costs make them seem.
This is because solar loans typically have lower interest rates - also known as APRs - than conventional loans. For example, in the last quarter of 2022, a solar loan for a person with excellent credit might have an APR that’s around 2%. Meanwhile, a home equity line of credit (HELOC) or home equity loan might have an APR of 6-7% for the same credit score.
With that higher interest rate, the total amount that you would pay in interest over 20 years would be a lot higher than with a solar loan with a lower APR. That higher total might even equal the dealer fee on a solar loan, making the two types of loans similar in cost over 20 years.
However, there’s still two big reasons why a conventional loan might be superior, even if the APR is substantially higher:
- The dealer fee on a solar loan is baked into the upfront price. This means that if you pay down the loan early, you won’t eliminate any of the cost related to the dealer fee. You’re stuck paying the full amount no matter how early you pay off the loan. On the other hand, if you pay down a conventional loan early, you will end up paying less in total interest charges.
- The interest on a home equity loan or HELOC can be deductible on your federal taxes.
It’s for these reasons why a HELOC or home equity loan is often the best way to finance solar panels.
Who are solar financing companies?
Some of the largest national solar companies, such as Sunrun, operate their own customer financing programs. Most solar installers aren’t large enough to do that, and instead partner with financial services companies so they can offer a loan option to their prospective customers.
The solar installers generally don’t make any money on this and would prefer if customers paid cash instead. They partner with loan companies as a convenience for their customers, which helps them close the sale.
Many lenders market their loans specifically for the solar market. Some of these include Mosaic, Sungage Financial, LightStream, SoFi, and Sunlight Financial.
Bottom line: treat financing as a separate product
If you are using financing to get solar panels for your home, you are really buying two products: a home solar system, and a loan. It’s easy to gloss over the fine print of a loan application, but in many ways the most important decision isn’t about the solar hardware, but how you’re going to pay for it.
Hidden fees are an unfortunate reality with solar loans. The best way to understand what these are? Always start by asking your installer for a cash price.
