Solar Loans 101
Solar loans are quickly becoming one of the most popular financing options for users of solar energy systems.
If you lack the upfront capital to buy a solar energy system outright, but want to maximize the financial benefits of the system over the long-run, then a solar loan may be just what you’re looking for.
The Basics
Solar loans work just like any other type of financial loan, with the added element that they are issued solely for the purpose of installing a solar energy system on your house.
Loans can be issued by solar installers, banks, municipalities, and credit unions, so there are plenty of potential loan providers to choose from.
Primary advantages of solar loans:
- In contrast to solar leases and PPAs, solar loans allow you to maintain ownership of your solar panels.
- Ownership of your solar panels allows you to maximize your energy savings by allow you to take advantage of all available solar tax credits and incentives. To learn more about these opportunities, visit our page about solar-related tax benefits and rebates.
- Solar loans offer the user immediate savings on energy costs.
- Zero-down solar loans are readily available.
Types of Solar Loans
There are two primary types of solar loans; secured and unsecured. The key difference between the two is that secured solar loans use your house as collateral, while unsecured loans use the solar panels themselves as collateral. Secured solar loans also typically come with lower interest rates than unsecured loans.
Property Assessed Clean Energy (PACE) loans are another type of solar loan available in select states. This state and municipality-backed program allows solar homeowners to finance their solar panels and pay back the loan via an additional assessment added to the property tax bill for a fixed period of time. The yearly energy savings are typically more than enough to offset the assessment payments. Like secured solar loans, PACE loans will typically have low interest rates since the loans are backed by a government entity.
The following federal government-backed loan programs, insured by the Federal Housing Administration (FHA), can also be used to finance residential solar installs:
Evaluating Your Financing Options
The increasing competitiveness of the solar market has led to an increase in financing options, such as solar loans, that homeowners can rely on to fund their solar investments.
The following chart gives an overview of the primary differences between the most popular solar financing options.
| Solar Lease | PPA | Secured Solar Loan | Unsecured Solar Loan | Cash Purchase | PACE Loan | |
|---|---|---|---|---|---|---|
| Upfront $ Required | Minimal or $0 | Minimal or $0 | Minimal or $0 | Minimal or $0 | Full payment | Minimal or $0 |
| Who Owns the System? | Third Party | Third Party | Homeowner | Homeowner | Homeowner | Homeowner |
| Term Length | Typically 20-25 years | Typically 20-25 years | Typically 10-15 years | Typically 5-20 years | N/A | Varies |
| Tax Deductible Payments? | No | No | Yes (interest portion) | No | N/A | Yes (interest portion) |
| Who Claims Tax Credits? | Third Party | Third Party | Homeowner | Homeowner | Homeowner | Homeowner |
| Operations and Maintenance Responsibility | Third Party | Third Party | Homeowner | Homeowner | Homeowner | Homeowner |
Solar loan recipients are immediately eligible for the 30% federal investment tax credit and additional state/local tax benefits. This fact alone will typically result in them providing greater savings over the term of the loan than what would be realized with a solar lease or PPA. This long-term savings potential is only further maximized given the increasing prevalence of zero-down solar loans.
While ROI will vary by locale and other factors, the following chart depicting 25-year returns on a solar investment in California underscores the immediacy and longevity of the energy savings that solar loan recipients benefit from as compared to solar PPA/lease holders and cash buyers.
Photo Source: Solar Power Rocks
Solar loans are a compelling financing option for solar homeowners seeking to both retain ownership of their panels and maximize their ROI over the long-term, especially during a time of historically low interest rates.
