What is a solar loan?

Man carrying a solar panel and talking to his young daughterImage: Man carrying a solar panel and talking to his young daughter

In a Nutshell

A solar home-energy system can help the environment and reduce energy costs over time but may cost thousands of dollars upfront. If you can’t afford the full system and installation costs, you may have financing options — including, possibly, a solar loan.
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Installing solar technology in your home can help the environment, decrease energy costs and increase the value of your home, but switching to a renewable-energy system isn’t cheap.

Installing a residential solar-energy system can cost tens of thousands of dollars, depending on its size, according to the Clean Energy States Alliance. While the cost of solar panels and solar-energy technology has been decreasing steadily over the years, not everyone can afford to pay the cost of solar upfront.

But if you want to install a solar home-energy system, financing options such as a solar loan may be able to help.

Solar-energy systems financing options

If you can’t afford to pay for the technology upfront, you may have a few options for solar financing: solar leases, power purchase agreements and solar loans.

Solar leases

With a solar lease, a business installs a solar-energy system on your property, but it still owns the system. You use the energy generated, and you pay the business a set amount on a regular schedule. Depending on the lease, the company might cover equipment and maintenance, or those costs could be on you. Make sure you read the lease agreement’s fine print to find out how much the solar lease will cost you.

Power purchase agreements

Similar to a lease, with a power purchase agreement, or PPA, a solar company installs, owns and maintains your system. You agree to purchase the power it generates at a set price per kilowatt-hour that’s typically competitive with the local electricity rate.

Since you don’t own the system — for both PPAs and solar leases — you aren’t eligible for any of the residential energy tax credits that can come with installing solar.

Solar loans

A solar loan is what it sounds like: a loan that allows you to purchase a solar-energy system and pay it off over time. Unlike with solar leasing or a PPA, you own the system outright, which can allow you to take advantage of tax incentives.

Monthly payments on a solar loan are often smaller than a typical energy bill, according to the U.S. Solar Energy Technologies Office (though making a larger monthly payment and shortening the term of the loan may save more in the long run). And you may even be able to get a subsidized solar loan with a below-market interest rate.

Let’s take a closer look at the types of solar loans that may be available to you.

Types of solar loans

Solar loans come in many forms, with features you might not find with a typical personal loan. Here are some of the solar loan varieties you’re likely to come across.

Home equity loan or line of credit

A home equity loan or line of credit, both of which are forms of home improvement loans, allows you to borrow against your home’s equity.

If approved, a home equity loan gives you a lump sum that you repay in equal installments over a set time period, while a home equity line of credit gives you revolving credit that you can borrow against (up to your limit) and reuse as you pay it back (like a credit card).

While neither is specifically designed to help you finance a solar-energy system, you can use home equity funds to purchase solar technology for your home. But you should only use these types of financing if you’re certain you can repay it — because if you can’t, there’s the potential you could lose your home altogether.

Unsecured personal loans

Banks, credit unions and online lenders offer personal loans that can be used for any purpose, including installing a solar-energy system in your home. While these loans may not be specifically for financing solar, if you have good credit or collateral, you may be able to get a personal loan at a favorable interest rate and repayment terms.

Some lenders even offer unsecured personal loans specifically marketed to pay for solar technology. These loans are typically fixed-rate and paid in equal installments over a set time period. As with other types of unsecured loans, lenders may offer higher interest rates for unsecured solar loans, since they consider unsecured loans to come with higher risks for the lender.

Secured solar loans

Some solar-installation companies offer loans that allow you to apply for financing directly through them. The loan is secured by the solar-energy system itself — in other words, if you don’t repay the company as promised, the lender can repossess it. Before you apply for financing from a solar-installation company though, compare loan terms, rates and costs with other loan options.

Loans from utilities or cities

In some states, certain participating utility companies actually offer on-bill financing programs. This means you can repay your solar bill via payments that go right on your regular electric bill. Additionally, some cities and other jurisdictions offer low-interest loans, rebates and other incentives for installing solar systems. To see what’s available in your area, view the Database of State Incentives for Renewables & Efficiency.

R-PACE solar loans

Residential Property Assessed Clean Energy loans, which are funded as a result of government programs partnering with private lenders, may be another option to help you finance your home with energy upgrades like solar-energy systems. But with this type of loan, you pay the cost off over a set number of years as an assessment on your home’s property taxes — in other words, you get a higher tax bill. Take note though: These loans aren’t available everywhere.

Fannie Mae HomeStyle Energy

If you’re buying or refinancing an older or energy-inefficient home, the Fannie Mae HomeStyle Energy mortgage lets you finance energy-related improvements as part of the mortgage. It allows you to fund clean-energy upgrades, like installing solar energy, at up to 15% of the home’s appraised value. This can eliminate the need to get a separate solar loan.

Should I get a solar loan?

Like any financial decision, there are pros and cons to taking out a solar loan.

A solar loan could make sense if …

  • You want to own the system but can’t afford to pay upfront
  • You want a tax break for installing a solar-energy system
  • You don’t mind paying for maintenance and repairs yourself

Before you go for a solar loan though, make sure to research all available options and get quotes so that you can compare interest rates and fees. And keep in mind that it’s a debt that has to be repaid and that applying for a loan may lower your credit scores.

Once you get your loan quotes, look at the estimates and make sure you can adjust your budget to make all of the loan repayments on time.

Bottom line

While paying cash for purchases may be ideal, the high cost of solar technology makes that impossible for many homeowners. Solar leasing may be an option, but if you want to eventually own your solar-energy system and benefit from the many tax credits and incentives available, a solar loan could be the best way to help you go green.

About the author: Emily Starbuck Gerson is a full-time freelance writer in San Antonio who’s been covering personal finance since 2007. She has written for numerous national publications and enjoys helping people make better decisions … Read more.