The complete guide to how to pay for solar panels

Pay cash? Get a loan? Lease? PPA? There’s a lot of options. Learn how they all work here.

Photo of solar panels.

If your roof is suitable and you’re in a sunny location, solar panels can be one of the better financial investments that you make. Solar is getting cheaper all the time and the federal tax credit was recently extended, but it still comes with a pretty big upfront price tag. Figuring out how to pay for solar is what this article is about.

As with anything related to finances, be sure to do your own research and consult with a financial professional when you have questions.

Here’s a pretty complete list of the different ways you can pay for solar panels:

  • Pay cash.
  • Take out a traditional loan, such as a home equity loan or HELOC.
  • Get a “solar loan” from a loan provider that specializes in working with solar homeowners.
  • Get a lease or power purchase agreement (PPA).
  • Use PACE financing.
  • Look for low income grants for solar.
  • Get a HomeStyle Energy Mortgage from Fannie Mae.

That’s a lot of options to consider. Let me walk you through each of them.

Pay cash

Paying cash for your photovoltaic system simply means saving up enough money so that you can write a check to your installer to cover the complete cost. This means you will own the system outright.

While this may be the most straightforward way of paying for your system, it’s not the easiest because it means you need to save enough money to pay for the full cost of the system before tax credits.

This is because the federal tax incentive and many state incentives for solar are given as a credit on your taxes. You apply for the credit when you file your taxes, and then wait for your tax rebate check to come.

If your solar tax credit is larger than the tax you paid in a year, you will have to wait even longer to get your full rebate, because unused solar tax credits can be rolled over to future years.

That wait period means that you need the cash to cover the pre-rebate cost of the system. A lot of people don’t have that amount of money sitting in the bank, so only a minority of people pay for solar this way. But if you can afford to, paying cash in many ways is the best way to go.

Disadvantages of paying cash for your solar panels

If you decide to pay cash, the main financial consideration is that you lose the opportunity of putting that money into an investment vehicle that might have a rate of return higher than the interest rate on your loan.

For example, let’s say you need to borrow $10,000 to pay for your photovoltaic system. You go to the bank, and they tell you that you can get a 4.5% rate on a home equity loan. If your $10,000 would have otherwise have gone into a 401(k) retirement plan, and your retirement portfolio is averaging a 6% return, you might come out ahead financially by contributing that money to your retirement account (especially because it’s tax-deferred) and then taking out the loan to pay for your solar panels.

Get a traditional loan (home equity or HELOC)

Another option is to go to a bank or online lender and get a traditional loan. Two good options include a home equity loan and a home equity line of credit (HELOC). Covering the ins-and-outs of personal finanace is outside the scope of this website, so read this article by Investopedia that explains how these loan products work and how they differ.

If you can’t afford to pay cash for your solar, getting a traditional loan is probably the best option for most people. The benefits include:

  • The fees for a traditional loan tend to be more transparent than when you get a loan from a solar financing company, due to hidden dealer fees. (More about that later.)
  • The interest on a HELOC or home equity loan can be tax deductible when you use the loan for a home improvement.
  • Because the loan is secured by your property, you will tend to get a lower rate of interest than with a non-secured loan (which most solar loans are).

For these reasons, a home equity loan or HELOC should probably be the first lending option for most solar shoppers. The tax deductibility is potentially a big benefit, but there is the caveat that you will probably only be able to take advantage of this if you itemize your deductions. Many taxpayers don’t, negating this benefit. You can read more in this article at Investopedia: Is Interest on a Home Equity Line of Credit (HELOC) Tax Deductible?

Regardless of which type of traditional loan you pursue, you may encounter difficulty if you don’t have a high enough credit score or haven’t built enough equity in your home yet. If that’s the case, you may have to wait until your home equity and credit score improve, or consider one of the alternatives described later in this article.

Get a solar loan

A solar loan is a loan you get from a company that specializes in lending to homeowners who are installing a solar energy system on their home. Most of the time, you will obtain this directly through your solar installer. They’ll help you through the application process and will usually give you a solar installation proposal based on a monthly loan payment. This makes it very convenient for the consumer.

Some of the biggest names in this industry include Mosaic, Sungage Financial, LightStream, SoFi, and Sunlight Financial.

These loans differ from traditional loans, like a home equity loan, in a few important ways:

  • They are usually unsecured loans, which means they don’t require you to use your house as collateral.
  • Solar loans can be easier to obtain than a loan from a traditional lender. This means that if you are denied a home equity loan or HELOC from your bank, you might be able to qualify for a solar loan.
  • Getting a solar loan requires you to be extra careful in understanding the terms and fees of the loan. Otherwise, you could end up paying much more than you expect.

Secured vs unsecured loans

A secured loan is one that requires you to put down collateral, such as your home. If you end up defaulting on the loan, the lending institution can recover their money by using the collateral - for example, by selling your home.

An unsecured loan doesn’t have this requirement. While this may sound like an advantage, an unsecured loan is a higher lending risk for a financial institution. Because of the lender’s higher risk, you will generally end up paying higher fees or interest rates with an unsecured loan.

Solar loans from companies like Mosaic are often unsecured. You can read more about secured vs unsecured loans by reading this article from Investopedia.

Things to watch out for when considering a solar loan

With any type of loan, pay attention to the details of the agreement, such as the fees and payment schedule. But with a solar loan, there can be a few important gotchas.

The biggest issue is what are known as dealer fees. These are loan fees that are often hidden from the consumer because they’re charged to the solar installer but ultimately passed onto the customer as a higher price.

The customer only sees the monthly financing costs, but the dealer fee isn’t revealed - in fact, the solar installer can even be contractually prevented from revealing what that fee is.

You can read more about this in my article on solar loan dealer fees.

Another issue is that you should consider before choosing a solar loan is that it can add some complexity if you want to sell your home. The reason is that many solar loans place a type of lien on your home called a UCC-1 filing. Technically, a UCC filing isn’t a lien on your house, but only on the solar equipment.

Even so, when a mortgage lender does a lien search on your property, the UCC filing will show up. If you’re selling your home and the buyer’s mortgage company does a lien search, the presence of the UCC filing may cause the mortgage company to delay closing until the lien is resolved.

While you will have options including buying out the loan, this can be an unexpected hiccup for home sellers.

It’s true that home equity loans and HELOCs also result in a lien on the home, but it’s generally well-understood by consumers that these types of loans use your home as collateral. Unsecured solar loans, however, often are unsecured so consumers may be surprised by the UCC filing.

Get a lease or power purchase agreement (PPA)

You might have heard about getting solar panels installed on your home for free. What? How is that possible?

It’s not actually free, but it is possible to get solar panels installed on your home for no upfront cost. “Free” solar panels refers to two similar financing options: a Power Purchase Agreement (PPA) and a solar lease. In both cases, the solar company owns the system they install on your home, and you buy the electricity it generates for a monthly fee. Because that fee is less than the normal rate of electricity you pay to the utility company, the net outcome is that you get solar electricity and still save money on your electric bill - in theory, anyway.

While this can seem like great option, there are significant caveats you need to be aware of. Some of the biggest are:

  • You won’t receive the federal solar tax credit.
  • Selling your house can be difficult because you’ll either need to purchase the system or convince the home buyer to take over the contract.
  • Escalator clauses will automatically increase your payments every year.
  • Leases are most often sold by the large national solar installers, who tend to have problematic consumer track records. Check out our articles on Sunrun and Momentum for examples.

Because of these reasons - and especially the escalator clause - some consumers who choose a lease or PPA end up paying more for electricity in the long run.

The only case I’d recommend considering a lease or PPA is if you have a low federal tax burden. (This might be the case if you’re retired.) For everyone else, you will almost always be better off choosing a different loan product or paying cash.

Leases and PPAs are such a problematic issue that I’ve written multiple articles:

Low-income solar programs

The first thing you should do is determine if you are eligible for any of the many programs that are available to help people with low to moderate incomes join the solar energy revolution. If you do qualify, you can access better rebates or even get free solar panels for your home.

Some programs are managed by local communities and non-profits, so this list may be incomplete. Be sure to check with your local municipality and utility company to see if there are additional programs available to you.

PACE financing?

Property Assessed Clean Energy is a program available in California, Missouri, and Florida that provides homeowners with 100% of the financing for a solar photovoltaic system. The program provides a number of unique advantages.

First of all, the principal is paid back over a period of up to 20 years as an assessment on your property tax bill. One major advantage of this is that if you sell your home before the financing is repaid, the assessment will continue to be paid by the future property owner as part of the annual tax assessment. This is helpful if you’re not sure if you will stay in your home for the duration of the loan, as the balance will automatically transfer to the next homeowner. (Just be sure to disclose the PACE loan to the home buyer!) That said, if you want to prepay the loan before selling the home, you have that option as well.

Another detail is that the loan amount you qualify for with PACE depends on your home equity, and not your credit score. This has both pros and cons: on one hand, this is helpful for people with a lower credit score. On the other, it also means that it’s easier to get yourself into a situation where you have more debt than you can handle.

PACE financing is also non-recourse, which means that if you end up defaulting, the lender is able to recover their money from your collateral (your home, in this case) but is not able to go after your other assets if there is any remaining balance. One thing to keep in mind is that because non-recourse loans entail a little more risk to the lender versus recourse loans, they often end up costing more.

Finally, the interest paid on a PACE loan is tax-deductable, just like mortgage interest.

However, consumers should be extra cautious and perform good due diligence before signing a PACE contract. While the program in theory is a good option for some borrowers, in practice the industry has been plagued by poor practices that have often targeted vulnerable people.

For example, here’s a excerpt from a Propublica article:

In its investigation, ProPublica found that PACE lenders in Missouri, including Ygrene, charged high interest rates over terms as long as 20 years, collecting loan payments through tax bills and enforcing debts by placing liens on property — all of which left some borrowers vulnerable to losing their homes if they defaulted.

Ygrene, one of the largest PACE lenders, was the target of class action lawsuits and has ceased its PACE lending program.

For more information about consumer issues related to PACE, check out this article by the Consumer Finance Protection Bureau.

To find out if PACE is available in your area: PACENation.

HomeStyle Energy Mortgage by Fannie Mae

The HomeStyle mortgage is a program run by Fannie Mae, and it allows a homeowner to use up to 15% of the assessed property value of their home from either a new mortgage or a cash-out refinance toward energy saving improvements to their home, including the purchase of a solar PV system.

This means that if your new mortgage is $100,000, and your home assessment is at least that much, you can use up to $15,000 of that mortgage toward energy improvements. Or, if you are refinancing a mortgage, you can use up to 15% of your assessed property value for energy improvements.

The benefit of the HomeStyle program is that you will often obtain more favorable terms than through other types of loans. This financing program is available through any Fannie Mae-approved lender.

Summary of how to pay for solar panels

These are a lot of options to consider! If you are trying to understand how to make a decision about the best way for you to pay for solar panels, here’s a table that summarizes the pros and cons of each:

Financing option Pros and cons
Paying cash positive Simplest option
positive You own the system
positive Can give you the highest financial return
negative Requires you to save all the money needed for the system
Home equity loan or HELOC positive Does not require you to build up significant savings
positive You own the system
positive Can give you the highest financial return
negative Getting a loan can be complicated
negative Requires you to have a good credit rating and enough equity in your home
PPA or lease positive Can allow you to go solar when you otherwise can’t afford to
positive Usually no upfront cost
negative You don’t own the system
negative Lower or possibly no long-term financial benefit
negative Can make a house sale difficult
negative Many contract details can be problematic
Solar incentives for low income households positive Can make solar affordable for household that otherwise couldn’t afford it
negative Not available everywhere
negative Usually has a limited enrollment
PACE financing positive You own the system
positive Interest paid is tax-deductible
positive Loan amount doesn’t depend on your credit score
negative Only available in CA, MO, and FL
negative Lenders often have a poor consumer track record
HomeStyle Energy Mortgage positive Can get better terms than a traditional loan
positive You own the system
positive Other pros same as a traditional loan
negative Only available through a Fannie Mae lender
negative Other cons same as a traditional loan
Solar loan positive Easier loan qualification
positive You own the system
negative Hidden fees
negative Usually inferior to other lending options

One important tip: always ask your solar installer for a cash-only price, even if you intend to find out what their financing options are. By getting a cash price, you eliminate any potential solar loan dealer fees from the equation.

While all this may seem confusing, the bottom line is that most consumers should choose the cash and traditional loan options first, and consider a solar loan as a second choice. Low-income consumers, meanwhile, may benefit from local and state programs, although unfortunately these can be hard to learn about.

Save 30% or more on home solar with current incentives

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Use our calculator to get a financial payback and solar performance estimate customized to your home, including federal, state, and local incentives.

When you’re ready, fill out our form to get a home solar quote from a local SunPower installer.