Complete Solar Financing Guide for 2021

solar financing
The biggest obstacle to installing solar in any situation is the up-front cost. It's the bottleneck that prevents solar from capturing a larger share of the energy market across the world, and it's the main reason why more homeowners don't install a solar energy system on their home. Solar is a very attractive long term investment that is low risk and offers high returns, but upfront costs prohibit many from taking part in it. A typical residential solar energy system size is 5kW. The average cost for this size of solar system is $14,550 according to Energy Sage. That's certainly not an amount that most homeowners have lying around! Luckily the Federal Tax Credit offers a 26% tax rebate for all residential PV system installations, cutting that average cost down to approximately $11,495. (See our page on Residential Solar Panel Cost for a full breakdown of costs and rebates) But still, paying over $10,000 in cash for solar panels is not doable for the large majority of homeowners. And that's where solar financing and solar loans come in. In this article we're going to go over the two main solar financing options: solar loans and solar leases (which include traditional leases as well as Power Purchase Agreements). We are also going to conduct an in-depth comparison of the two options over a 25-year period so that you can see the financial implications of each.

Solar Loans

Perhaps the best way to cover the high up-front cost of a new solar system is through a solar loan. Just like any personal loan, you receive the cash upfront to pay for the full cost of the solar panels (minus whatever down payment you make) and then pay it back with interest through monthly payments.

Two Types of Solar Loans: Secured vs Unsecured

There are generally two different routes you can take when looking to take out a solar loan: secured and unsecured. A secured loan is backed by your equity in your home and thus requires a home equity loan or a home equity line of credit (HELOC). An unsecured loan is a more traditional loan that isn't backed by your equity or assets. The key difference is that lenders face much less risk with secured loans and thus the interest rate tends to be much lower. But let's quickly run through both types.  

Secured Loan

A secured loan requires that you back the the loan with the equity you currently have in your home. It's essentially a 2nd mortgage based on the equity you've already put into your home. This allows lenders to give you a lower interest rate because they have more protection in case you aren't able to repay it. But this also means that you could face foreclosure if you are unable to make your loan payments. There are a few different ways that you can obtain a secured loan, including a traditional 2nd mortgage (home equity loan), a home equity line of credit (HELOC), a Property Assessed Clean Energy (PACE) loan, or a Federal Housing Authority (FHA) loan. The length of a typical 2nd mortgage is usually 10 to 15 years at an interest rate between 3% and 8%. Fees are usually in the $1,000 range.   Pros
  • Low interest rate
  • Maximizes the overall value of your solar panels over the long term
  • Interest on secured loans is often tax deductible
  Cons
  • Requires significant equity in your home, a good credit score, and favorable debt-to-income ratio.
  • If your financial situation is not secure, you could face repossession if you can't make payments
  • Longer closing times (usually a few weeks)
  • Will not be able to use your the equity in your home for future projects or purchases
 

Unsecured Loan

An unsecured loan does not involve putting up your home equity to back the loan. This means that there is more risk for lenders, leading to a higher interest rate. There are many companies that offer unsecured solar loans including Mosaic Solar, Dividend Finance, and Sun Power. Additionally, most (if not all) solar installers have partnerships with unsecured solar loan lenders and can connect you when the time comes. Unsecured loans are typically 5 to 20 years in length with a wide range of interest rates from 5.5% to 20% or higher depending on credit score. The fees for unsecured solar loans are also typically much higher than for secured loans.   Pros
  • You don't have to leverage your biggest asset (your home), freeing it up for other projects or purchases
  • Instant approval
  • No risk of home repossession if you default on loan
  Cons
  • Higher interest rates
  • Typically longer terms
  • Interest on unsecured solar loans is not tax deductible
  • Lower long-term value
  • Higher fees
 

Which Solar Financing is Right For You?

There are obviously pros and cons with each of these solar loan options, but what it ultimately comes down to is this: how much equity do you have in your home and are you willing to take out a home equity loan to pay for your solar panels? If you can qualify for a home equity loan and are willing to use your home as collateral, then you should absolutely go with a secured solar loan. The terms (length and rates) are just far better with this route, maximizing the long-term return on investment of your solar energy system. But if you don't have significant equity in your home or if you aren't able to qualify for a secured loan due to credit score or debt-to-income ratio, that does NOT mean you should give up on trying to finance your solar. Unsecured loans are still an incredible way to eliminate the up front cost of solar. Even with a higher rate, the savings on electric bills will still more than make up for your monthly payments and allow you to reap the rewards of your solar investment. We will dive into the more specific financials later on when we compare solar loans to solar leases and power purchase agreements.  

Solar Leasing and Power Purchase Agreements (PPA)

If you cannot afford the up-front cost to purchase a solar panel installation for your home, there are two other options besides a loan: a solar lease or a Power Purchase Agreement. The general idea behind both of these options is the same - you are paying for the use of a solar panel system without owning it. There really isn't a HUGE difference between solar leases and PPAs. The rates for both are calculated using the implied power production of the solar panel installation on your roof. The only difference is that PPA rates are calculated in real time (how much energy your solar panels produced month by month) while solar leases are calculated beforehand to stipulate a consistent monthly rate. Even though your solar panel setup will produce more energy in sunny months, the solar lease agreements bakes that into your monthly rate and essentially smooths it. One big factor in solar leases and PPAs is something called a price escalator. This is an annual increase in your monthly payments (either in the price you pay for electricity in a PPA or in the flat monthly rate in a traditional lease) that can tank the value of your solar installation. The typical solar leasing contract includes a 3% annual price escalator. For your solar lease to maintain its initial value, the annual increase in price of local electricity must be larger than 3%. The average increase in electricity rates across the US from 2010 to 2019 averaged 1.27% per year. This means that your solar lease would decline in value by 1.73% each year. This is a huge issue with solar leases and Power Purchase Agreements! But keep in mind that climate and economic factors could absolutely push the annual growth rate of electricity prices far higher than 3% in the coming years!  

Pros of Leasing a Solar Installation

The main benefit of leasing rather than buying your solar panels is that you don't have to take on a long-term solar loan and accumulate debt. However (and this is important) solar leasing contracts typically span the same amount of time as solar loans — about 20 to 25 years. So, no matter what, you are going to be under contract if you don't buy your solar panels outright. Another benefit is that the company you lease your solar system from will take care of all maintenance for you. But...solar panels really don't require much maintenance! They simply need to be cleaned once in a while, particularly if you live in a snowy state. Almost all residential solar panels are tilted, allowing rainwater to organically clean and wipe debris away from them. Solar leasing contracts also offer built-in guarantees on your installation, but you get those when you buy solar panels as well.  

Cons of Leasing and PPAs

Now that we are delving into the cons of solar leases, we'd like to let you know that we here at Solar Action Alliance almost exclusively recommend that our readers buy rather than lease their solar panel installations. Even though you may have to dive into the world of solar loans, the benefits far outweigh the risks. But we will get into that shortly. The main con of leasing is that you don't get to take advantage of Federal Tax Credits and local rebates! In 2021 and 2022, the Federal Government is offering a whopping 26% solar investment tax credit on the entire purchase of any solar panel installation you purchase. When you lease, you do not get this tax credit. Instead, the solar installer reaps those rewards. Another con is that you only have so much space on your roof, and when you lease instead of buy, you aren't maximizing the value of your home's roof. We will crunch the numbers in a little bit, but needless to say the long-term return on investment is far higher when you buy your solar panels, especially when you factor in the price escalators that we mentioned above. The final important con is that leasing solar panels is often unattractive to home buyers if you want to sell your home while under contract. You will have to sign over the leasing contract to new owners who are often wary to enter into a pre-ordained long-term agreement. On the flip side, paid-for solar panels have been shown to increase home values by an incredible 4%!  

Crunching the Numbers: Solar Loan vs Solar Lease/PPA

Okay, it's time to crunch the numbers! We are going to compare the two most popular solar financing options:
  • Solar PPA lease agreement
  • $0 down secured solar loan in the form of a home equity loan
  Important Note! The Federal Solar Tax Credit of 26% was extended into 2021 and 2022. We used 21% in our calculations so they are off by a bit. This just means that financing throiugh a loan is an even better deal!   In each case we will use Orlando as our example city and use a 5 kilowatt system (an average residential solar system size) as our example installation. Here are some constants that will be true for each scenario:
  • Raw cost of the 5kW system is $13,450
  • Price after 21% Federal Solar Investment Tax Credit is $10,625
  • Average cost of electricity from utility company for 2021 is 11.45 cents per kiloWatt hour (kWh)
  • Average annual increase in electricity rate will be 3%
  • Solar panel installations will last 25 years in this scenario
  • We will assume the 5kW system will produce 6,750 kWh per year and that it is all used or sold back (through net metering) to the utility company for the same price they charge (11.45 cents).
 

Contract A: Solar Lease PPA

After much research, we have determined that a typical Power Purchase Agreement in Florida will cost homeowners around 6 cents per kiloWatt hour for all electricity generated from their solar panel system. This is almost a 50% reduction in the cost you would be paying from the utility company! Because the annual increase in the cost of your lease (price escalator) is 3% and the cost of electricity goes up by 3% each year, those essentially cancel out. A typical solar leasing contract will run for 25 years, so let's run the numbers over 25 years. Each year, you would save 5.45 cents per kiloWatt hour on your total energy costs (11.45 cents (utility rate) - 6 cents (solar rate). Then we multiply 5.45 cents/kWh saved by 6750 total kWh produced to find that you would save approximately $368 on your power bill that first year. This means that you would save a very substantial $9,200 on your energy costs over the 25 year life of the contract. Total Paid to PPA Provider Over 25 Years: $10,125 Total Saved Through Solar PPA Lease: $9,200 Final Return on Investment for Solar PPA Lease: 91%  

Contract B: Secured Solar Loan (Home Equity)

Secured solar loans range from 3% to 8.5% interest rates depending on credit score and amount of equity in your home, but we will use 7% as our example APR. Lengths of solar loans vary, but we are going to use an 8 year loan (96 months) so that we can avoid paying a lot of interest over a long time period. To start, let's just calculate how much you will pay for your solar panels over the 20 year term assuming you put $0 down and use the 21% Federal Tax Credit. The total cost of the system in this scenario is $10,625 after the tax credit is factored in. Now we just stick these numbers into a loan calculator to determine the total cost of our solar system after the interest rate accrues over 8 years. The total amount of interest paid is $3,276, so we just tack that onto the original loan amount to get $13,901. This is the final cost for 25 years of significant solar power! Now we just need to calculate energy savings. As we mentioned, this 5kW system will produce 6,750 kWh per year. And we know that the cost of electricity starts at 11.45 cents and grows at a rate of 3% per year. If we didn't go solar, what would we be paying on our electric bill for that same amount of energy? The first year, we save $772.88 on our electric bill. We replaced 6,750 kWh with solar power and didn't have to pay 11.45 cents for any of those kWh. But the price of energy is expected to rise in the coming decades! If we plug the 3% annual increase in energy prices into a calculator, we find that by 2046, we will be paying $1,571 each year for those same 6,750 kiloWatt hours. The total cost that we wold pay the utility company over those years would be a whopping $28,179.  

Calculating Return on Investment For Solar Financing

The most basic calculation we can make here is to subtract the cost of solar energy (what we paid for our solar panels) from the amount of money they've saved us on our electric bill over that 25 year period. $28,179 - $13,901 is $14,278. That means that you invested $13,901 to install solar and it yielded $14,278. This is a return of 103% or about 4.12% per year. While this may not seem like a whole lot, remember that this is essentially a risk-free investment that comes with all of the other advantages that solar energy brings you (environmentally friendly, free from the grid, not subject to fluctuating energy prices). But there's one more thing! We mentioned previously that transitioning to solar energy adds approximately 4% to the value of your home. If your home is valued at $250,000, after you install a solar energy system, it's now worth $260,000. That's $10,000 more to tack on to your return on investment. $14,278 + $10,000 is $24,278. While this number is definitely a ballpark that depends on the size of your home, electricity rates in your area, and your current home value, around $25,000 is not far from the real return on investment of going solar.   Total Spent on Solar Panels: $13,901 Total Energy Savings and Increased Home Value: $24,278 Final Return on Investment for Secured Solar Loan: 175%

 

Wrapping Up Solar Financing

When it comes down to it, solar energy is all about the numbers. You want to maximize long-term return on investment based on the financial circumstances you're currently in and your appetite for taking on short-term debt. It's pretty clear that, of all the solar financing options, a secured solar loan is definitely the most lucrative in the long term. Our example scenario showed a secured solar loan means that you could potentially get around a $25,000 return on investment after you pay off your solar loan. On the other hand, a PPA return on investment was only about $9,200. Does that mean that a PPA or solar lease is a bad decision? Not necessarily in the short term, but in the long term it means that you are not extracting maximum value our of your roof. In our example, if you went with solar lease over solar loan, you would be missing out on $15,800 in value. The issue is that the monthly payments rise every year, you miss out on tax credit advantages, and you give a third party solar installer all of the leverage your roof has to offer. And your home would be harder to sell rather than increasing in value! But again, it all depends. It depends on your credit score, whether you want to explore solar loans, and how much ownership you want to have over your solar panel system. Make sure you fully investigate your situation and find the best solar financing option for your needs!

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