If you’re considering solar, you’re likely wading through the different ways to pay for your new solar system. The options range from outright ownership by paying for your system upfront in cash to leasing your panels from the installation company – but the most common way to pay for solar is with a solar loan. Loans of any variety can be challenging to navigate, and solar loans are no exception! In this article, we’ll walk you through the basics of solar financing and how to determine what solar loan might be best for you.
Disclaimer: This article is intended to provide an informational overview of solar loans for interested homeowners. It is not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a professional before making any purchase or investment decision.
- Solar loans are a common way to finance your solar installation. You’ll still own your system and, in many cases, reduce your monthly electric expenses without paying for it upfront in cash.
- Low-interest loans are not always lower-cost loans. Some solar lenders offer low-interest rate loans to keep monthly payments low, but tack on a hefty initiation fee, increasing the total cost of ownership. If your interest rate seems too good to be true, it probably is.
- Depending on your credit score and a few other factors, you’ll likely have more than one option for solar financing – EnergySage can help you determine which will work best for your finances.
- There are two major types of solar loans: secured and unsecured. The notable difference between the two is that a secured loan requires an asset (such as your home) as collateral.
- Head to the EnergySage Marketplace to receive multiple solar quotes and explore your solar loan options!
What’s in this article?
- What is a solar loan?
- How to choose a solar loan term
- Solar loan options
- Where can you get a solar loan?
- Pros and cons of solar loans
- How to pick the right solar loan for you
- Frequently asked questions about solar loans
What is a solar loan?
Have you ever taken out a loan for a home renovation project? Solar panel loans are similar to home improvement loans, which have been used for decades to undertake projects like building a deck, upgrading an HVAC system, or adding a new bathroom. Like these other types of loans, when you borrow money from a lender to finance a solar panel system, you agree to pay it back (plus interest) in monthly installments over a fixed loan term.
Solar panel loans have the same basic considerations as other types of loans. As you compare your solar loan options, you’ll want to consider all the features of the loan, including:
- Loan term: the maximum timeline you’ll make payments on the loan
- Interest rate or APR: the amount lenders charge for borrowing their money (a percentage of the initial loan amount)
- Fees: any additional charges the lender assesses at the initiation of the loan.
We dive deeper into each of these topics below but visit our solar financing glossary for even more terms.
Solar loans allow you to own an asset that generates significant financial value
There’s one significant difference between a typical home improvement loan and a solar loan. Unlike a home improvement loan, a solar loan allows you to dramatically reduce or eliminate your electric bill over the system’s 25-year lifespan. You’ll also benefit from property value appreciation, the federal investment tax credit, and other incentives. While a new kitchen is a nice addition to your home–and one that will likely improve your property value–it doesn’t offer the same type of continuous financial benefits.
Your principal is the initial size of your loan or the amount your lender gives you to pay for your solar system. The principal is essentially the entire cost of your solar system: the cash amount you would pay if you purchased your solar system outright. As you continue to pay off your loan, your principal will be the amount that you still owe on the loan itself. You can likely make principal payments to lower the overall cost of your loan and cut down the amount of time you are paying it off. If you receive a quote with a cash price different from the financed price, that’s a hint that your loan has fees. Always ask your installer to clarify any discrepancy between the cash and financed pricing.
The financing term is often referred to as the “loan term,” “loan length,” or “loan contract,” and is the length of your loan or the maximum length of time you’ll be making payments. Your financing term will impact your interest rates, monthly payments, and the return on investment (ROI) of your solar panels. Keep reading to learn how to select the best loan term for your situation.
For example, if your solar loan was $20,000 and you make an initial payment of $7,000, the total principal amount of your loan is now $13,000. You’ll then only be charged interest on the $13,000 instead of the initial loan amount, and you’ll pay less interest overall.
Interest rate and APR
People often confuse interest and annual percentage rates (APR). Depending on your lender and the type of loan, you may see percentages for an APR and interest rate in your loan documentation. If this is the case, the APR will usually be higher than the interest rate because it includes other loan fees.
- APR is the annual cost of getting credit, expressed as a percentage.
- Interest rate is the amount you pay to borrow from a lender in exchange for getting money to finance your solar panel system, expressed as a percentage.
You’ll typically pay some sort of solar loan fee, whether an origination/dealer fee or a closing cost. For solar loans, the most common fee is an origination fee or dealer fee, similar to an origination fee on a home loan. Fees can either be laid out as a flat amount or a percentage of your total solar loan amount.
- Origination/dealer fee: also known as an initiation fee, loan fee, or lender fee, solar lenders sometimes charge a premium to cover the risk associated with lending money for a loan. There’s no industry standard dealer fee, so it’ll vary depending on who is offering the loan.
- Closing costs: occasionally, your solar loan may have closing costs listed, similar to an origination fee, in that they cover the associated risk the lender takes by closing on the loan.
How to choose a solar loan team
Your monthly payment, interest rate, and the overall cost of your solar panels will all depend on your loan term, so it’s important to choose wisely and select a loan term that works best for your situation. In general, the longer your loan term, the more interest you’ll pay – meaning you’ll pay more for solar. However, if you’re interested in keeping your monthly electric expenses low and replacing your electric bill with a solar loan payment, you might want to consider a longer-term loan.
Long- or short-term loan: which should you choose?
|Longer loan term||Shorter loan term|
|Higher interest rate||Lower interest rate|
|Lower monthly payments |
(Because you’ll be making payments over a longer period)
|Higher monthly payments |
(Because you’ll make fewer payments over the life of your loan)
|Higher total cost of ownership||Lower total cost of ownership|
|You could start saving day one: best for minimizing your monthly electric expenses, or replacing your utility bill for a solar loan (think bill swap)||You’ll save the most over time: best for maximizing your savings from solar and improving your ROI|
EnergySage industry data shows that most solar loans are typically paid off in seven to nine years – this may be because a homeowner sells their home, refinances, or simply pays off the loan within that period. With this in mind, some homeowners choose a longer loan term to keep their monthly expenses low and simply pay off the loan when they have capital available (you’ll want to know if your lender charges a prepayment penalty before taking this approach – read more on that later).
It’s also important to remember that you’re eligible to receive the federal solar tax credit after you install your solar system, which will be 30 percent of your solar system’s total cost. If you use your solar tax credit to pay off some of the principal of your loan, you’ll have even less to pay in the long run! Some loans are structured to consider this and adjust your payment amounts based on when you are receiving your benefit from the tax credit. You may see changes in the monthly amounts you are being billed if this is the case. If not, you can use the lump sum you receive from the tax credit to pay off a large portion of your loan’s principal.
Should you choose the loan with the lowest interest?
Different lenders offer different interest rates, and If you’ve shopped for a loan for your home or car before, your eye may be trained to seek out the option with the lowest interest rate. However, while shopping for solar loans, it’s important to consider all of the features discussed above – not just the interest rate – to ensure you’re getting the best deal and the loan that works best for you.
In some cases, solar lenders use initiation or dealer fees to subsidize artificially low interest rates for their loan product. In other words, they can charge less in interest because they charge more in upfront fees.
Dealer fees can be as high as 30 percent and are often hidden in the financed price of the loan (be sure to inspect your quotes and ask installers about differences in cash and financed prices). So even if your interest rate is low, you’ll be paying 30 percent more for your solar panel system, negating any benefit you may expect from selecting a loan with a lower interest rate. We encourage you to consider the total cost of ownership of your solar panels rather than using interest rates alone to evaluate your loan options. A loan with no dealer fee may have a higher interest rate, but, in most cases, you’ll pay less for your panels overall if you select this option, especially because solar loans are not usually held for the full loan term (remember, most homeowners pay off their loans in seven to nine years).
Solar loan options
Like any other financial option, solar loans come in different packages with varying structures, terms, and conditions. Let’s explore what to consider when finding the right solar energy loan:
Secured vs. unsecured loans
You can categorize most solar loans into two general buckets: secured and unsecured loans. Secured loans require an asset that will serve as collateral for the loan – in most cases, that asset will be your home, and your lender will put a lien on your property. Unsecured loans, on the other hand, don’t require any collateral other than the solar equipment itself. Here are the major differentiating factors between the two loan types:
Secured solar loans vs. unsecured solar loans
|Secured solar loans||Unsecured solar loans|
|Requires an asset for collateral (i.e. lien on your home)||Yes||No|
|Lenders may foreclose if you default||Yes||No|
|Interest is tax-deductable||Sometimes||No|
|May have undisclosed fees||No||Yes|
Amortized vs. re-amortized solar loans
Your solar loan will either be amortized or re-amortized – there are benefits and drawbacks to each type. You’ll find that most secured loans are amortized, meaning you have a set monthly payment and terms, while most unsecured loans are re-amortized, which means you pay a lump sum after a certain amount of time (usually approximately one year), and then your payments reduce after that lump sum payment.
Where can you get a solar loan?
Solar loans have become increasingly accessible in recent years – and the number of banks and institutions offering solar loans continues to grow!
If you’re already getting a quote from a solar installer, it’s likely that they’ll come to the table with a few different financing options. On the EnergySage Marketplace, you’ll see your solar loan options when you receive your solar installation quotes. Those loan options–and others you find directly–can come from a few different sources:
- Credit unions: local banks and credit unions all over the country offer energy loan products for homeowners. You can often find some of the lowest-cost, most advantageous loan options here!
- National lending institutions: solar is growing in popularity, and big banks are jumping on board. Many now offer specialty loan products tailored to residential solar panel systems.
- Public-private partnerships: local government agencies often partner with private lenders to offer solar loans with lower interest rates and no fees.
- Utilities: some utility companies offer competitive on-bill financing programs that allow you to finance solar energy systems and repay the borrowed amount as part of your monthly electric bills.
- Municipalities: though not available in all states, some municipalities offer Property Assessed Clean Energy (PACE) solar energy financing. When you finance a system with a PACE loan, you repay it via an annual assessment on your property tax bill.
- Specialized solar lenders: many companies today specialize in–and solely provide–solar loan products. They partner with banks and a network of solar installers to offer loans.
Check out EnergySages’s solar loan lending directory. If you get a solar loan quote through EnergySage, our team of Energy Advisors can help you understand your options and what you’re looking at with your various offers.
What are green mortgages?
Green mortgages are a way to pay for a solar system on a new home. In addition to the borrowed money for your home mortgage, you can also borrow a secondary amount to pay for the upgrades involved in a solar system. There are even green refinances available depending on the lender you choose.
Pros and cons of solar loans
Once you understand your solar loan options, you’ll need to determine whether or not a solar loan is right for you – here are some of the significant advantages and disadvantages of solar loans:
Pros and cons of solar loans
|Pros of solar loans||Cons of solar loans|
|Allow you to install panels with no upfront costs. Many loans are $0 - down, making solar accessible even if you don’t have the liquidity for a large upfront payment. (Which most people don’t!)||ROI will not be as high as someone who has purchased their solar system outright because you will need to make monthly payments on your loan, and it will take you longer to break even on your investment.|
|Your electric expenses are fixed for the term of your loan. If your solar panels cover all of your energy needs, you’ll only pay your fixed monthly payment for the life of your loan.||Not all loans cover battery storage, so you may find you have fewer options and need to shop around for one that covers storage if you plan on installing storage.|
|You own your solar system, making it easier to sell your home, and meaning you are eligible for federal and local tax credits and other incentives.||Can be confusing and trap consumers in an agreement that is not favorable to them. Read the fine print and understand the loan terms and conditions before you sign!|
|Greater ROI than someone who goes solar with a solar lease or PPA|
|Typically paid off over a shorter period than the actual loan term. If prepayment or refinancing is allowed in your loan terms, you may end up paying less over the lifetime of your loan than you initially anticipated.|
Pros of solar loans
The pros of a solar loan likely outweigh the cons for you if you are interested in owning your solar system but do not currently have the cash for an upfront payment and want to see consistent, fixed costs for your electricity payments over the next few years. You also may end up paying off your loan early, which could end up saving you even more money!
Cons of solar loans
The cons of a solar loan may impact your decision more than the pros if you are interested in breaking even on your investment in solar as soon as possible. If this is the case, you’ll want to purchase your system outright instead of going with a solar lease or PPA. Additionally, if you are interested in a solar-plus-storage system, you may not be eligible for some solar loans that do not cover storage.
Can you finance a battery installation with a solar loan?
Yes! But this isn’t an option with all types of loans, so make sure to confirm with your chosen financier specifically before proceeding just to be safe. Many lending institutions these days allow you to wrap in battery costs in your full loan amount, and some have even built tailored solar-plus-storage or standalone storage loan packages
How to pick the right solar loan for you
Choosing the right solar loan for you can help you maximize your solar savings as quickly as possible. You’ll want to make sure you understand all of the fees you’re paying, when you’ll be paying them, how these fees impact your overall payment structure and payback period, and any additional costs you might need to consider as part of your loan fine print (such as any prepayment penalties that would prevent you from paying off any portion of your loan early and saving money).
With this in mind, we created a checklist with four questions you should ask your installer or lender about your solar loan:
1. What is the difference in the cash price?
Some installers offer a different price for cash buyers than those financing solar. Before deciding how to finance your system, it’s worth asking your installer to make sure you get the best deal that’s affordable for you. If you’re able, you’ll pay less for your system (thanks to fees and interest rates) by paying upfront in cash, allowing you to reap the benefits of your solar savings much quicker than if you financed your system. You should also factor in all available rebates and incentives that will result in a lower upfront cost.
2. What’s the interest rate and loan term?
Confirm the length of the loan and the interest rate you’ll be paying. This is called out in your EnergySage quote online or in any loan paperwork if you’re using a lender outside of EnergySage. Make sure you understand if any changes will happen to your payments throughout the loan. Sometimes you’ll see higher monthly payments outlined for the first year or so of your loan term, which is your lender taking into account the tax benefits you’ll receive from the 30 percent investment tax credit.
3. What is the fee?
Confirm the fee you’re paying, whether it’s an origination or dealer fee. Refer to our definitions of both types of fees earlier in this article to determine what happens when you agree to either of these fees as part of your loan. Be sure to read all of the fine print of your loan agreement because dealer fees can often be baked into the cost of your entire solar system and are not always initially apparent.
4. Are there any prepayment penalties?
Our industry data show that many solar loans are paid off earlier than the agreed-upon loan term, meaning many homeowners are prepaying their loans. Most solar loans don’t have a prepayment penalty, which is a charge for making payments on the principal of your solar loan and paying off your loan early. But you’ll want to ask and confirm in any loan documentation if there is one.
Frequently asked questions about solar loans
Can you get a solar loan with low credit?
Yes, you can get a solar loan even if your credit score is less than ideal. You may see higher monthly payments and interest rates, but an increasing number of solar loan providers are offering loans that do not have credit requirements. Learn more about going solar with low credit.
Are solar loans worth it?
In most cases, yes. If you cannot pay for your solar system upfront in cash, then a solar loan is your next best option. You are still eligible for many of the benefits of a cash purchase, and there are multiple options available when it comes to solar financing.
Are solar loans tax deductible?
This depends on the type of loan you choose. If you have a secured loan, all your interest payments and fees are tax deductible. However, if you have an unsecured loan, your loan payments are not tax deductible. Consult with an accountant or CPA to confirm any tax deductions on your taxes.
Start shopping for solar today
Sign up on EnergySage for free to get connected with installers in your area who offer financing options or work with trusted local solar lenders. If you have any questions along the way about what solar financing might be best for you, speak with your installer or lender. Through your EnergySage account, you can compare multiple quotes and financing options so you can go solar with confidence.