What is the best way to finance solar panels?

Incentives like the 30% federal tax credit help make home solar panels affordable to many households, but the upfront cost is still high. Here are some tips help you decide how to pay for it.

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For the fiscally-minded homeowner (and what homeowner doesn’t care about their investment?), adding home solar panels can be a way to add equity to your house, slash electricity costs, and make a great long-term investment.

On top of that, you’ll be helping the environment too.

Sounds like a no-brainer? Maybe. How much you can actually save with solar panels depends on a few factors. For example, not every roof is equally suited for solar panels.

How you pay for your solar panels is another key factor. If you want to minimize the total amount you pay for your solar panels, which - if you’re using a loan - consists of the principal plus the loan interest - the best choice for most people is to use a secured loan. This type of loan requires you to have equity in your home that is used as collateral, allowing you to obtain a loan with a lower interest rate.

What does it cost to install solar panels?

On average, your immediate out-of-pocket costs for a home solar system will be in the range of $20,000, give or take several thousand dollars.

Prices will also vary from state to state, and equipment choices and the size of the system have a big impact on the price too.

In addition, every house has different electricity consumption, utility rates, roof sizes, and sunshine, making it impossible to give an accurate price estimate without knowing the specifics of the home. While The Solar Nerd calculator is pretty good at giving you a quick back-of-the-envelope price estimate, to get a true cost you’ll need to get multiple quotes from your local installers.

What types of loans can you get for your solar panels?

There is a dizzying array of choices when it comes to paying for solar panels, more than other types of home improvement. This is because there are financial products specifically marketed at solar, such as solar loans, leases, and power purchase agreements (PPAs).

While these solar financial products are all designed to make it easier for homeowners to get solar panels by lowering the upfront cost, as the saying goes, there is no free lunch.

Solar loans are typically unsecured, which means that you don’t need to put up equity in your home as collateral. The financing company won’t have a lien on your home that allows them to repossess or even sell the home if you can’t make your payments.

This is a risker loan for the lender, so they increase the fees to compensate, either through a higher interest rate or other fees.

Other options include secured loans such as a home equity loan, home equity line of credit (HELOC), mortgage cash-out refinance, or second mortgage.

Unsecured loan types include personal loans or even a credit card.

You should probably avoid a solar loan

Solar installers partner with loan companies to offer financing to their customers, but they often don’t make any money on this. Instead, they offer loans as a one-stop-shopping convenience and to help close the sale.

There are a few big names that offer solar loans through installers, such as Mosaic, Sungage, GoodLeap, and Sunlight Financial.

When you get a solar quote from an installer that includes financing, it’ll show the basic terms of the financing, such as the interest rate (the APR), the number of years you’ll be paying the loan, and your monthly payment.

These loans will often have a good APR to make them seem competitive with secured conventional loans. However, the rate can be deceptive. This is because there are often hidden fees baked into the price.

Sometimes known as dealer fees, these are costs that are typically in the range of 10-30% of the system price. This means that if the base price of your solar system is $20,000, the dealer fee for a solar loan might be as high as $4,000.

It’s called a dealer fee because the financing company charges this to the solar installer, not the customer directly. However, the installer will almost always pass this fee directly onto the customer by increasing the price of the system. You might not even know it because some financing companies have a contract with the installer that forbids them from revealing the dealer fee. This means that you could be paying an extra 20% and not even know it.

From the point of view of the consumer, a dealer fee makes the solar system look more expensive, but in reality you’re paying a premium for the financing. If the installer isn’t permitted to disclose the fee, you won’t even know it.

Always ask for a cash-only price from your solar installer

Here’s perhaps the biggest tip for saving money on solar panels: always ask the installer for a cash price. This is true even if you ask them to give you a financing option as well. By calculating the total amount will you pay for your loan over the 20 or 25 year duration and comparing it to the cash price, you’ll know exactly what the true price of your loan is.

You can find many loan calculators online that can help you with this math.

If you need to finance your solar panels, just get a regular loan from your bank

When you get a conventional loan from your bank, the fees are summarized in a legally-required Truth-in-Lending Disclosure. While there may be fees charged, such as an origination fee, they shouldn’t be as high as the 10-30% dealer fee that solar loans charge.

What type of loan should you get to pay for your solar panels? If you’ve been paying down your mortgage for awhile and now have some equity in your house, two choices are a home equity loan and a home equity line of credit (HELOC). Typically, a HELOC has a variable interest rate while a home equity loan has a fixed rate.

You will typically pay a higher APR with either of these types of loans than with a solar loan from your installer. However, there are two important points to know:

  • Dealer fees on solar loans are baked into the price you pay, so paying your loan off early won’t reduce this fee. This means that if you might pay off your loan early, a conventional loan will likely save you money.
  • Solar loans are covered by the Truth-in-Lending Act, so financing charges such as dealer fees should be disclosed. However, some solar loan companies don’t have the best track record when it comes to consumer practices, as a recent lawsuit by Minnesota’s Attorney General describes.

For these reasons, you are often better off getting a conventional loan from your major or other major loan provider.

The finer details of this are outside the realm of this blog, so I’d suggest checking out other good resources such as Investopedia.

“Secured” solar loans might not really be

Some solar loan companies, such as Sungage Financial, advertise that their loans are secured because they are secured by the value of the solar equipment and not the home.

While it may be technically true that these loans are secured, it’s not what people typically mean when referring to a secured loan.

A home is obviously much more valuable than a used solar array. If you end up defaulting on the loan, the lender is more likely to get their money back if the loan is backed by a house. This is one reason why a secured loan is usually the cheaper option.

Tax advantages of home equity loans and HELOCs

One last thing worth mentioning is that if you take out a home equity loan or HELOC to make improvements on your home, the interest you pay on the loan is tax deductible. This makes these types of loans - which are usually already a better deal because they’re secured loans - even cheaper than an unsecure solar or personal loan.

Should I just pay cash?

The cheapest way to get solar panels for your home is to save up enough money to cover the cost of paying for it upfront. You won’t have any loan fees or interest rates to raise the total cost of the system.

Of course, it can be hard to save up tens of thousands of dollars. While the federal tax credit (and possibly a state tax credit, depending where you live) will be available to you, you’ll need to wait until tax time to claim the credit and receive your rebate.

It’s also a little more complicated if you consider the investing opportunity cost. The basic idea here is that money that you’re saving up to pay for your solar system could be invested somewhere and earning you money, possibly more money than you would pay out in loan interest.

This is also getting outside the expertise of myself as a solar nerd, so check out other good resources to help you figure this out.

What about a lease or power purchase agreement (PPA)?

When you apply for a home equity loan or HELOC, your credit rating will come into play. Having a very good credit score will reduce your interest rate, which in turn lowers the cost of your system.

But what if you don’t have a good credit score? Some installers will tempt you with a lease or power purchase agreement (PPA). In fact some installers - particularly the large national companies such as Sunrun, Vivint, and Momentum - will pitch this as a first choice, regardless of your financial situation.

I’ve written multiple articles about this, but the bottom line is that leases and PPAs are often a bad trap that can sometimes leave the homeowner paying more for electricity than they did before installing solar panels. The contracts can be full of gotchas, and a type of lien called a UCC-1 can complicate a house sale.

If you’re unable to qualify for a conventional loan at a reasonable rate, don’t be tempted to go with a solar lease. You would be better off waiting until your financial situation improves, or spend a smaller amount of money on energy efficiency improvements, which can often have a better payback than solar panels.

I’m ready to get solar panels. What should I do?

If you’ve done your homework and you’re ready to take on financing to get solar panels for your home, what’s the first step you should take?

Probably the best thing to do is get a preapproval on a secured loan. This will give you an idea of how much of a loan you’ll quality for, and what the interest rate will be. You can approach your bank for this, but you can also apply to online banks or get multiple quotes using an online service such as Lending Tree.

Once you have a preapproval, you’ll have one less thing to think about when you get quotes from solar installers.

#Financing #Leases and PPAs

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