At a Glance
Installing solar panels in your home can be an excellent way to source your energy needs from an eco-friendly source. Now thanks to the federal residential solar energy tax credit, it’s more affordable than ever to finance solar panels for cheap. Here’s what you need to know about getting the financing you need, plus a few tips for optimizing your credits and tax savings.
In this article, you’ll learn:
What is a solar panel loan?
Solar panel loans are financing options designed solely to help you pay for the installation of solar panels on your house. Installation is typically the most cost-prohibitive part for homeowners as it can often reach $20,000+, so banks and solar companies have created special financing programs that help break up the upfront costs.
Solar panel loans typically have competitive rates and a variety of payment plans that can fit most budgets. Here are a few of the most popular solar loan options currently available:
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How does a solar panel loan work?
Solar panel loans work the same as other home-improvement-based personal loans. Depending on your credit score, debt-to-income (DTI) ratio, and the amount needed, you can qualify for a fixed-rate loan that will cover the cost of the solar panel system installation. Then, over a few years, you’ll make regular payments every month that pay off the loan.
What credit score do you need to get a solar panel loan?
Like other personal loans, the financing rates you’ll get on a solar panel loan get more favorable the higher of a credit score you have. But at the minimum, you should have a credit score of at least 600 to ensure you’ll be approved for financing.
Pros and cons of taking a loan for solar panels
1. Lower out-of-pocket expense
Using a solar panel loan will spread the upfront cost of your installation over a few years, saving you from needing to deplete your emergency fund or retirement savings.
2. Tax benefits
There are multiple federal and state tax rebates available that can help offset the cost of your solar panel financing. Currently, the Federal Solar Tax Credit allows you to reduce the total amount of federal taxes you owe by up to 30% as long as you install the panels before 2032. Check your state’s Department of Energy website or consult a CPA to see which local and state programs you could qualify for that reduce your costs even further.
3. Creates energy and income
Many utility companies offer an energy buyback program that lets you hook your solar panels up to the local grid network and will pay you for it! Not only will you be able to get “off the grid,” but you could also earn a few extra bucks for it, too.
4. Boosts property value
Solar panels are often seen as a selling point for potential homebuyers, making your home more desirable in the marketplace and getting higher offers should you decide to sell.
1. Risk of high interest rate
Solar panel loans, particularly from solar panel installation companies, may tend to skew higher with their interest rates than typical personal loans. Do your research and shop around for the best rate before deciding on your lender.
2. May not have the savings
Solar panels can be a “slow burn” sort of investment that takes a while to recoup. You may not see significant savings on your energy costs right away, especially if you’re swapping a monthly electric bill out for a monthly loan payment.
How to get a solar loan
1. Estimate the cost
Talk to a few solar companies and get multiple quotes to see how much an installation will set you back. Ask if there are different levels of panels you can choose from or if the company only offers one version.
2. Calculate your payment rate
Use a personal loan calculator to help you determine your monthly costs so you know how it will fit into your budget.
3. Compare different rates
Solar panel loans are really popular now, so there’s no shortage of loans out there. Shop around and see if it’s more cost-effective to work with a bank or directly with the installation company.
4. Apply and get the loan
Most solar panel loan applications work the same as any other personal loan. The lender will pull your credit score, want details of your income, etc. It’s best to collect your W-2s or income statements and tax documents to help speed up the application process.
Solar panel financing options
1. Personal loan
Personal loans are excellent options to finance your solar panel installation and may be easier to get than a specialized solar loan.
2. Company financing
Some installation companies will offer customer-direct financing options that let you pay the installer over time, saving you the trouble of dealing with a bank.
3. Home equity loans
Tapping into your home’s equity is another excellent way to invest in your home without using a traditional loan. Home equity loans will let you borrow against 80% of the equity you have accrued already as the homeowner for a fixed-rate loan. You’ll then make payments like you would any other loan and once you’ve paid it off, the loan is closed.
Learn more: How Does a Home Equity Loan Work?
4. Home equity line of credit (HELOCs)
HELOCs work the same way as a home equity loan: they tap into the equity you already have as the homeowner. Unlike equity loans, though, HELOCs are revolving lines of credit (similar to a credit card) allowing you to tap, and retap, into your equity as needed.
5. Leasing or power purchase agreement
Leasing panels allow you to add solar panels to your home for no upfront costs. However, you won’t own the panels, so any tax incentives won’t be available for you to claim. Instead, you’ll pay a monthly fee for “rent.” Besides foregoing the hefty installation costs, you’ll be able to defer maintenance and upkeep to the owner, saving you the headaches.
6. Through cash
If you’d rather skip the financing hoops completely, consider just paying cash. You may be able to get a discount, too, and can recoup some of that cash on your next tax filing.
Is it a good idea to invest in solar panel loans?
Solar panels are an excellent way to increase the value of your home while reducing your dependency on fossil fuels. However, there are some things you need to keep in mind.
1. Calculate the cost and saving according to sun exposure
Solar panels are becoming more efficient and effective every year, but they still need direct sunlight to work best. Make sure you’re in an area that gets enough sun exposure for your investment to be worth it. Solar panels work best on roofs that are due south, so check the direction of your home. If you don’t have a southern-facing roof, you may be able to install the panels in your yard (if there’s enough space).
2. Decide the size of the panel
There are a few different sizes of solar panels available, so make sure the size you need is available in your area. Typically, most panels range between 3-5 feet long.
3. Estimate the payback period
Using a loan calculator can help you understand how long it will take you to pay off your solar loan and let you start enjoying the energy savings as quickly as possible.
Most solar loans range from eight to 20 years but are typically paid off within six to 10 years.
Depending on your payment schedule, interest rate, and amount borrowed, you can expect to start recouping your costs within five to 20 years.
Once you’ve paid off your solar loan the panels are then owned by you, allowing you to start using free energy generated from your panels.
Most purchase power agreements and solar leases tie to the home’s title, meaning that failure to maintain good standing on your payments can result in a lien being placed on your home. Consequently, it’s very difficult to get out of a solar loan without paying the loan off in full. You may be able to transfer the loan to a new homeowner if someone buys your home, but this is a hard selling point for potential homebuyers. Your best bet is to thoroughly understand the commitment you’re agreeing to before signing the loan documents.
Solar-specific loans tend to have interest rates that range between 4% – 17% APR. However, this can fluctuate due to market conditions, inflation rates, and your credit score.
A solar loan is not considered a second mortgage. However, certain types of solar loans (leases and purchase power agreements in particular) can be tied to your home’s title, meaning you could have a lien added to your title until the loan is back in good standing.
Most states in the U.S. will have a deceased person’s debts handled by their estate after death, meaning that assets will be sold off until the debt is paid off. Debts will rarely be passed on to the next of kin. However, you may want to consult with an attorney if you have a spouse or partner also listed in the loan agreement.
The amount you’ll save depends on several factors, such as the size of your home, the size of the panel system, the amount of sunlight your house receives, the cost of energy, etc. On average, you should expect to save $11,500 over 20 years.
The majority of solar panel loans do not have a down payment requirement. However, your lender may have specific rules that differ from the standard, so be sure to ask first.
Yes, most solar loans do not include a prepayment penalty (an additional fee that’s charged for paying a loan off early). The sooner you pay off a solar loan, the faster you’ll start recouping your investment!
Solar loans work like a typical personal loan: For a fixed amount of time, you make monthly payments that cover your principal and the interest charged. Once you’ve paid off your loan, the solar panels are yours. As the owner, you’ll be eligible for tax credits and deductions that help reduce the overall cost of your investment. But since you’re the owner, you’ll be the one responsible for maintenance, repairs, and upkeep.
Solar leases allow you to put solar panels on your roof, but you’re not the owner of the panels. The good news about this is that you’re not the one responsible for the repair, maintenance, or upkeep and won’t need to handle the burden of getting a loan. The downside is that since you’re not the owner, you’re not eligible for tax breaks or incentives and will be required to pay the owner’s rent every month until your lease expires. The owner can then decide to renew or remove the panels.
Power purchase agreements (PPAs) work like solar leases in that you don’t own the panels but can still harness the energy savings. The main difference with a PPA, though, is that your monthly payment will be based on energy use and not a fixed amount, meaning your monthly payment will fluctuate based on how much energy you consume.
Currently, the federal government offers solar panel owners a 30% tax credit for systems purchased between 2022 – 2032. Solar systems purchases in 2033 and 2034 will be eligible for 26% and 22% tax credits, respectively.
Additionally, many states offer their tax incentives for green energy options. Consult your state’s Department of Energy or Department of Taxation website for more details.
Some banks, particularly green banks, will offer solar-specific loans, while others will offer personal loans that can be used as a catch-all for whatever home improvement project costs you’re looking to pay for.
The best way is to avoid the financing costs completely by paying cash. If that’s not a feasible option, though, you’ll need to evaluate the pros and cons between borrowing money via a solar loan or leasing the equipment on a rental or PPA basis.