Solar loans vs. solar leases

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So you know you want to finance your solar panel system, but one big question remains: should you lease your system from a company, or own your system and finance it with a solar loan? The answer here depends on a few factors, including your preferences, needs, and financial goals. 

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Solar loan, or solar lease: costs and benefits summarized

Let’s break down the advantages and disadvantages of your various financing options:

Financing optionUpfront costMonthly cost20-year benefit
Cash$$$$$$$$
Loan$$$$
Lease$$$$

Comparing if a solar lease or loan: which is right for you?

With both solar loans and solar leases/power purchase agreements (PPAs), you can access the financial benefits of solar energy, but understanding the differences between the two can make it easier to choose the best option for you and your home. 

Cash flow over the length of the agreement

Both $0-down solar loans and $0-down solar leases/PPAs can result in immediate savings; you’ll spend no money out-of-pocket, and oftentimes, your monthly loan or lease/PPA payment will be less than your current monthly electricity bill. The monthly savings from a solar loan, however, will likely be higher than the savings from a solar lease or PPA. This is because solar loans are typically paid down in 5 to 15 years, whereas leases require regular–and sometimes, escalating–payments over the term of the agreement (20-25 years).

Though less common, you can finance with a prepaid or custom down payment lease/PPA – this will require some money out-of-pocket, but can also result in lower monthly costs.

Tax credits and other financial incentives

When you buy a solar panel system, you’re eligible for the solar investment tax credit (ITC), equal to 26 percent of the cost of the system upon installation. Even better, many states also have local rebates and incentives available that extend your savings even further. However, keep in mind that solar incentives typically go to the owner of the system. If you choose to finance with a solar loan, you directly benefit from the financial incentives. On the other hand, if you sign a solar lease/PPA, the owner of the system is the solar company, so they receive the financial incentives instead.

Monthly payments: How big? Fixed or increasing?

Solar leases and PPAs are generally offered for a 20- or 25-year term, while solar loans come with term lengths that can vary from 5 to 20 years. When it comes to monthly payments, most solar leases and PPAs increase at a predetermined rate of 1 to 3 percent annually, while solar loans typically have fixed monthly payments.

Loans with a shorter term (i.e. five to 10 years) will most likely have a higher monthly payment than a solar lease or PPA – but if you put the term lengths on an even playing field, the monthly payments for a 20-year solar loan are often lower than those of a 20-year lease or PPA. How much lower depends on whether your solar loan is secured or unsecured.

System operations and maintenance

The first thing to know here is that solar energy systems require little maintenance over their lifetimes. That being said, if and when maintenance is required, the responsibility typically falls on the system owner.

If you choose a solar lease or PPA, the leasing company owns the PV system and typically will offer a service program to cover any maintenance issues that arise during the lease term. If you take out a solar loan to purchase your PV system, you will be responsible for its maintenance. That doesn’t mean you’ll be without protection: solar equipment comes with warranties from manufacturers that last 10-30 years, and your solar installers will also provide their own workmanship warranty.

Time to process financing applications

Solar lease and PPA applications can be approved and signed in a single meeting with the solar company. In comparison, solar loans generally take longer to approve, and may involve additional administrative steps (i.e. property appraisals, title searches, and mortgage filings) that can extend the approval process out for several weeks.

Selling your property

If you need to sell your home during a solar lease or PPA term, you either need to buy out the lease/PPA from the third party owner or transfer the lease over to the new homebuyers.

If you use a solar loan to finance your system, your options differ depending on whether your loan is secured or unsecured. Regardless of the type of solar loan you finance with, however, solar-equipped homes sell faster and at a premium, so you could even recover a higher amount than what you owe on the system.

Availability of solar loans vs. leases/PPAs

While there are lenders offering solar loans in all 50 states, solar leases and PPAs are not legally permitted in many areas of the country for residential solar panel systems. At least 28 states and Washington, D.C. authorize or allow solar PPAs.

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