When it comes to installing solar panels on your home, you have essentially 3 options to pay for it:
- Paying Cash Up Front
- Signing a Power Purchase Agreement or Solar Lease
- Taking Out a Solar Loan
As you can imagine, option 1 is by far the best option for long term return on investment. The problem is that most homeowners don’t have enough liquid cash to pay for a $10,000+ solar system outright. That leaves the final 2 options: Solar leases/PPAs and solar loans.
In our Solar Financing Guide, we ran a long term financial projection to show that Power Purchase Agreements and solar leases are the worst route to take when it comes to installing a solar energy system on your home. The biggest issue is that when you lease, you aren’t eligible for the 26% Federal Solar Tax Credit. The company that installs it receives that money instead. Considering that solar panel installations run over $10,000, you are losing out on at least $2,600 in tax credits. The other issue is that these agreements have steep “payment escalators” that add 3% to your lease payments each year, reducing the amount you save on your energy bill with each passing year.
What we’re saying is that if you want to install solar on your home but don’t have the cash to pay for it up front, the best option is a solar loan.
Solar Loan Basics
A solar loan works exactly like any personal loan – a lender gives you the money to pay for your solar energy system and you pay them back with interest over time.
Types of Solar Loans
There are generally two types of solar loans: Secured and Unsecured. The main difference is that with a secured solar loan, you are putting up your equity in your home as collateral for the loan and with an unsecured solar loan you are not. Because of this, secured loans typically have lower interest rates. But let’s go into further detail here.
Secured Solar Loan
A secured loan means that you put up your equity in your house as protection against the loan. Because the lender now has insurance against your failure to pay back the loan, they are able to offer lower interest rates and more favorable terms.
A typical secured loan lasts between 10-15 years. The interest rate depends on your credit score but is within the 3% – 8% range. The associated fees are around $1,000.
There are a few different types of secured loans:
- Home Equity Loan (2nd Mortgage)
- Home Equity Line of Credit (HELOC)
- Property Assessed Clean Energy (PACE)
- Federal Housing Authority (FHA) Loan
PACe and FHA loans are interesting options but are a subject for a different article. The two most common types of secured loans are 2nd mortgages, in the form of a Home Equity Loan or HELOC.
When you take out a Home Equity Loan, you receive a lump sum payment with a fixed interest rate over the length of the loan. This option tends to be better for solar panel installations because you will know the full cost up-front and can just take out that amount.
When you open a Home Equity Line of Credit, you essentially open up a credit account with your bank where you can take out money as needed up to a certain amount with the interest rate fluctuating over time. These tend to be better for remodels where the full cost isn’t yet known. They can be a good option for solar if you are installing solar panels in addition to other home improvements.
Pros:
- Lower interest rates
- Lead to a higher return on investment in the long term
- Interest on both types of secured loans is tax deductible (huge!)
Cons:
- More stringent requirements: considerable equity in your home, high credit score, and solid debt-to-income ratio.
- If you are not able to make the payments on the loan, the bank can sell your house to pay it off.
- Longer closing times
- If you choose a Home Equity Loan, you usually won’t be able to use that equity in your house for future projects until you pay the loan off.
Unsecured Solar Loan
An unsecured loan is a loan taken out without having to use the equity in your home to back it. The issue with this is that the lender takes on more risk and must charge a higher interest rate.
The unsecured solar loan space has exploded in recent years, but consumers need to be wary of the ultra-low interest rates being offered by these companies. These are often accompanied by astronomical “dealer fees” or “origination fees” that allow them to advertise such a low interest rate.
Some companies that offer specialized unsecured loans for solar projects are:
You can also get an unsecured personal loan from general lenders like your bank or online marketplaces like SoFi, Best Egg, or Upgrade.
The interest rates for these loans range from 4% to 20% depending on the length of the loan and your credit score. Loan length can be anywhere from 2 years to 25 years, depending on whether you want higher monthly payments and an earlier payoff or lower monthly payments and a later payoff. Like we mentioned above, personal loans tend to have a lot of fees attached, so be sure to do your research before signing anything!
Pros:
- You don’t have to leverage the equity you’ve built in your home
- Instant approval
- Often offered by the solar installers to make the process more frictionless
Cons:
- Higher interest rates
- Reduces the long-term return on investment of your solar system
- Higher fees
- The interest you pay is not tax deductible as it is with secured loans
Which Solar Loan Option Is Best For You?
With both of these types of solar loans, there are advantages and disadvantages, but the ultimate question you have to ask yourself is: do you have enough equity in your home for a secured loan and are you willing to take out a loan based on your home equity to pay for the solar panels?
The terms (length and rates) of secured loans are far superior to personal loans. So if you have the equity and you are willing to put it toward your solar transition, it really makes a lot of sense. But you absolutely have to make sure your financial situation is solid enough to make the payments or else you risk repossession of your home.
If your situation is not so secure and you don’t quality for a secured loan based on your credit score or debt-to-income ratio, than an unsecured loan is certainly better than not going solar at all! Unsecured/personal loans are still a completely viable way to eliminate the up-front cost of solar – even with a higher rate you are still going to save big on your electric bill and generally reap the rewards of a solar installation.
Comparing Both Solar Loans: Secured vs Unsecured
In this section, we will paint two financial scenarios – one where you take out a secured loan and one where you take out an unsecured loan. We will look at your monthly payments and what your long-term return on investment will be in each scenario. This should help you decide on which of the solar loans is right for you.
Constants In Both Scenarios
In both scenarios, there will be some constants that won’t change. They are:
Location: Orlando, Florida
System Size: 5 kiloWatts (average system size in the US)
System Cost after Federal Tax Credit: $9,953
Loan Amount: $10,000
Electricity Cost: 11.42 cents per kiloWatt hour
Solar Panel Life: 25 years
Average Electricity Consumed: 10,000 kWh per year
Average Electric Bill: $95/month
Solar Energy Produced: 6,750 kWh per year
New Energy Bill: $31/month
Home Value: $250,000
Value Added to Home by Solar Panels (4%): $10,000
Unsecured Loan Breakdown
For this example we are using Lightstream which offers specialized unsecured solar loans. You can see a breakdown of loan lengths and rates here. To access their lowest interest rates you must have a virtually pristine credit score, so we will use the median interest in this example.
Loan Length: 5 years
Loan Amount: $10,000
APR: 11%
With these loan terms, here is the what you’re looking at in terms of monthly payments and total interest paid:
Fixed Monthly Payments: $221
Total Interest Paid: $3,260
For the first 5 years after your solar energy system is installed, your monthly expenses will go up. Instead of paying $95 a month on your utility bill, you’ll be paying $252 a month – $221 toward monthly loan payments and $31 toward your utility bill.
This is because when you go solar, you are interested in the extreme long-term return on investment and lower utility bill payments for the 20 years after your unsecured loan is paid off. While it is possible to immediately reduce your monthly expenses by signing a longer term loan with lower monthly loan payments, you are ultimately reducing the return you’ll get on your solar panel installation.
So what kind of return are we talking about? Let’s do the math.
Total Paid for Loan and Interest: $10,000 loan + $3,260 interest = $13,260
Yearly Home Energy Savings: Saving $64/month X 12 months = $768
25 Year Energy Savings: $19,200
So you spent $13,260 on your solar panels and saved $19,200 over their 25 year life (and keep in mind this doesn’t factor in rising energy prices!). This means that…
Electric Bill Return on Investment: 44.8%
But wait! We haven’t even factored in the value that solar systems add to your home. Across the United States, it’s been shown that homeowners who purchase a solar installation for their home add 4% in value to it. Home buyers across the country have been shown to be willing to pay $15,000 more for a home with solar equipment. For this example we will stick with the 4% increase in value.
Total Value Added to Home: $10,000
Total $ Gained With Solar Panels: $29,200
Total Return on Investment: 120.21%
Annual Return on Investment: 3.21%
Okay, let’s keep this in mind as we do the same analysis for Secured Solar Loans.
Secured Solar Loans Breakdown
We will use the same loan length for this example but the rate will be lower due to the use of home equity.
Loan Length: 5 years
Loan Amount: $10,000
APR: 7%
With these loan terms, here is the what you’re looking at in terms of monthly payments and total interest paid:
Monthly Payment: $198
Total Interest Paid: $1,880
As you can see, both of these numbers are significantly lower. And another factor is very important: the interest paid on a secured loan is tax deductible! This means we are not going to factor that $1,880 into the return on investment numbers (because you can write it off!)
Total Amount Paid for Loan: $10,000
Yearly Home Energy Savings: Saving $64/month X 12 months = $768
25 Year Energy Savings: $19,200
This means you spent $10,000 and got a return of $19,200.
Electric Bill Return on Investment: 92%
And once again we factor in the change in the worth of your home:
Total Value Added to Home: $10,000
Total $ Gained With Solar Panels: $29,200
Total Return on Investment: 192%
Annual Return on Investment: 4.38%
What Does It All Mean?
So, as you can see, unsecured loans do not quite match secured loans if you want to take advantage of the huge return on investment of renewable energy and residential solar. The ultimate difference over a 25-year period is $3,260, the amount of non-tax-deductible interest that you paid your lender for the unsecured loan. It’s not a huge difference in the grand scheme of things, but to us, $3,000 is a lot of money!
We hope our breakdown of these residential solar financing options was helpful in your pursuit of knowledge around solar financing and solar loan options.
We firmly believe that solar loans are the best way to finance your solar because they allow you take advantage of the massive 26% Federal Solar Tax Credit. If you choose a Power Purchase Agreement or solar lease, you would be missing out on $2,600 in value in the above scenario.
There is no doubt that the cost of solar is high, but luckily the tax credit and increasingly palatable solar energy financing options make the goal of installing solar panels on your home very attainable.
If you want a similar breakdown of all financing options (included PPAs and leases), definitely check out our Solar Financing page.
