Are you thinking about installing solar panels on your home and wondering how to pay for it? If you are considering going solar, the good news is the price of these systems has dropped in recent years. And there are many solar panel financing options than ever.
Keep reading to learn about the available options to finance solar panels for homeowners, including solar panel loans.
Overview of Solar Panel Financing
Most Americans finance their solar panel systems. The reason is the price. Most systems cost between $15,000 and $35,000, depending on the size, ranging from 2 to 20 kilowatts. Paying for the system in cash is the cheapest long-term option, but most Americans choose to finance them.
Several financing innovations have grown the solar market in the US substantially in the last decade. There are two major categories based on ownership of the solar panel system: third-party ownership and homeowner ownership with a solar loan.
Some companies will install the solar system for you and also provide financing. These firms are called full-service solar developers. Other companies only install the solar system and the financing is provided by a bank, credit union, or utility.
Solar Panel System Third-Party Ownership
Third-party ownership of your system allows you to avoid high upfront costs and spread the payments over many years. It also puts most of the responsibility for maintenance and system operation on the third-party owner. Today, at least 40% of American homeowners with solar systems use third-party ownership.
There are two types of third-party financing arrangements to consider:
The homeowner signs a contract to pay scheduled payments to the solar leasing company over a 15 or 20 year period. That company installs and owns the solar system on your property. You consume whatever amount of electricity the leased system produces.
If it produces more electricity than you consume in a month, you may get a credit for that extra power from your utility company. You pay the regular electricity rate of any power you use beyond what your solar system produces.
Power Purchase Agreements (PPAs)
With a solar PPA, the homeowner contracts with a solar project developer that installs, owns, and runs the solar system on your property. It agrees to provide all of the power produced by the system to you at a fixed rate, which is usually similar to what you pay your utility company.
This arrangement allows you to use solar power at a defined per-kilowatt-hour rate while not paying for the upfront costs of the system. You also do not need to be concerned with maintenance and system operations costs. You know how much the electricity will cost for the entire PPA term, so you are not subject to increased electricity rates in the future.
Solar Panel System Direct Ownership
Some homeowners choose to own their systems themselves. Unless they pay cash for the system, this is usually done through a solar loan.
A solar loan allows the homeowner to finance their system from a solar developer or lender. With this option, you own your solar panel system. There are a variety of solar loan options with various monthly payments, interest rates, loan terms, and credit requirements.
Some solar loans require collateral to secure the loan. In some cases, the lender may require you to take out a home equity loan to finance the solar panel system. The advantage of this second mortgage option is the interest rate will be lower (3-8% usually), but your house is on the line if you do not pay the loan.
Other solar loans do not require collateral and are known as unsecured loans. You will not lose anything if you do not pay the loan (other than damaged credit), but the interest rates are higher (6-30% depending on your credit).
Many solar loans allow the homeowner to start saving you money from day one by designing the repayment terms, so the monthly loan payments are lower than the reduction in your electricity bill. On the other hand, paying the loan sooner and over a shorter period may reduce your positive cash flow upfront. But it will shorten the time you need to get to the post-loan period when your monthly electricity savings will be much higher.
If you are interested in maximum returns from your solar panels, seek a loan with the shortest term possible, such as five or eight years. This will give you a higher monthly payment that is equal to or greater than your electric bill.
But once the loan is paid off, you get essentially free electricity from your system. Solar panels have a 25-year warranty, so you can enjoy up to 20 years of free electricity. Plus, we know that electricity prices rise over time, so your free electricity will be worth even more over the years.
Third-Party Financing or Direct Ownership
The major decision to make with a solar panel system is whether to lease it through a third-party or own it directly with a solar loan. Below are some points to consider about each option.
- Allows the homeowner to avoid high, upfront solar panel system costs and spread the payments over many years.
- Puts most of the responsibility for maintenance and system operation on the owner of the system.
- With a lease, homeowners pay a fixed price for the equipment but do not know for certain how much they will save on their utility bills.
- With Solar Power Purchase Agreement (PPA), the solar finance company owns the system on your property and is given a fixed per-kilowatt-hour rate. The homeowner knows how much the solar electricity savings will be for the entire loan term, and is protected from utility price increases.
- Third-party ownership precludes the homeowner from taking advantage of state and federal incentives for installing solar panel systems, such as the solar tax credit.
- Third-party ownership may limit your ability to alter property if the change affects solar access.
- Direct ownership with a solar loan allows many monthly payment types, interest rates, length terms, and credit requirements.
- A solar loan allows you to qualify for the solar tax credit, which is a federal program that allows you to claim 26% of your installation costs when you file your federal taxes.
- Some solar loans require collateral for the loan, while others do not.
- A solar loan can be designed so your monthly payments are less than your reduced electric bill. But paying a higher loan payment will pay off the loan sooner. Getting the loan paid off is the key to enjoying maximum monthly savings with a solar panel system.
- If you want maximum savings, take out a short-term solar loan and pay it off as fast as possible. Once the system is paid off, you will enjoy essentially free electricity for up to 20 years.
- If you directly own the system and you do not have insurance on it, and warranty is expired, you bear the risk of system problems and damages.
Bottom Line with Solar Panel Home Loans
Owning a solar panel system on your home can save you a lot on your electric bill and help the environment. It also is estimated that a solar panel system can add 4% to your property value. Many homeowners are using HELOC loans if they choose not to work with solar finance companies.
Unless you pay for it cash upfront, leasing or buying the system are your options. Both offer affordable monthly payments but different advantages and disadvantages. Talk to your installer about the best option for you.