Understanding Solar Loans

Solar loans are a financing option that allows you to pay for your solar panels over time. They can be an excellent option for people who want to purchase solar but don’t want to take out a traditional loan or obtain financing from their bank, since solar loans are usually offered through third-party providers like solar companies. But how do they work? What kind of expenses do they cover? And should you get one? Here, we’ll answer all these questions and more so that you can decide if getting this loan is right for you.  

These solar system loans can still be offered by banks and credit unions, but not always. Solar loans are also sometimes referred to as PACE or Property Assessed Clean Energy financing because they use a property assessment as collateral for the loan.  

What Exactly Is a Solar Loan?

Solar energy loans are a type of home equity line of credit that uses your home’s solar panels as collateral. But this is only one version of it, as they can be without collateral too.  

The amount you can borrow through these home solar loans will be determined by the value of your panels and how long they are expected to last, which determines how much money they’re worth. For example, if the life expectancy for your system is 25 years with no maintenance costs and the current value of such a system is $15k, then you could potentially borrow up to 80% of that, or $12k (80% x $15k).  

Depending on when you take out this loan, you might be eligible to get low-interest solar loans with an interest as low as 4%. However, if you choose to take out a traditional 30-year fixed rate mortgage instead (assuming rates don’t rise substantially), it would probably have an interest rate of around 5%.  

Types of Solar Loans

These loans are a great way to get started if you are interested in solar power. They’re usually available for homeowners and businesses, but some lenders may also offer these loans to individuals.   

There are two main solar loan options: secured and unsecured type. Secured loans are backed up by an asset, typically your home. Because they do have collateral, they offer borrowers lower interest rates, with an APR of about 3-8%. HELOC loans are a good example of these loan types. 

Another good example is the PACE loans we already talked about and they are secured through a lien of your property tax. These loans are offered to individuals with low credit scores, but also charge higher interest rates than HELOCs.  

The other type is unsecured loans. For them, you don’t need collateral to qualify. The APR is higher on these loans as opposed to the secured ones, and they can go even to 20%.  

Here are some other things you need to know about solar financing:  

• Solar leases are another popular way of going solar. They can be a good option if you want the benefits of solar power but don’t have the money or desire to buy your own system outright. With this type of arrangement, you make regular payments over time—usually 20 years or less—and then transfer ownership of your system when it’s paid off.  

• Another option is Power Purchase Agreements (PPAs). With PPAs, you pay a flat monthly fee that covers all your electricity needs. In exchange, an independent company installs and maintains panels on your roof that produce up to 80% more energy than those installed by local utilities at no cost or risk for at least 25 years!  

Solar Loans: Pros and Cons

Like with any other loan type, they have their own set of pros and cons you need to look into before deciding on anything.  

Pros  

Solar loan financing is a great way to get panels, whether you’re purchasing them or installing them yourself.  

• No upfront costs. A solar loan is a great way to make the switch to solar without spending thousands of dollars.  
• Tax credits. You’ll be eligible for tax credits from the federal government that can help you reduce your monthly payments and make solar a more affordable option for you.  
• Low-interest rates and low monthly payments. With a solar loan, your monthly payment will be lower than what it would be if you were paying for electricity from your utility company directly.   
• If you’re installing solar panels yourself, using an existing loan can be helpful in financing this project as well. In some cases, arranging financing before starting the installation process will help ensure that everything goes smoothly once the project gets underway.  

Cons  

• Long-term commitment required – Most lenders require that borrowers commit to paying off their loans within 15-20 years, which means locking in those rates during this time period even if they change later on. This may be too lengthy of an obligation depending on how long your home lasts before needing repairs or upgrades in order to continue using its current electrical infrastructure.  
• If you have a score lower than 620, you may not be eligible for this loan.   
• If you live in an area where there is a lack of sun or where power companies don’t offer net metering programs, then a solar loan may not make sense for you.  

What Expenses Are Covered by Solar Loans?

The loan will cover the cost of the solar panels, installation, and maintenance. The solar system itself is not included in this price.  

If you choose to buy a new home with a solar power system included, then you may be able to get it for free. Be sure to talk to the lender if you have any problems with a budget. 

Are Solar Loans a Good Idea?

The answer to this question really depends on your personal circumstances. If you can afford the monthly payments and have a high credit score or large amounts of equity in your home, then yes, this option may suit you very well.   

Solar loans give homeowners the opportunity to install solar panels without having to pay for them upfront. They allow homeowners to finance their purchase over time and make monthly payments on the loan until they’ve paid off the full cost of their system.   

Additionally, deciding to install these panels will help the borrowers save money in the long run.

Other Solar Financing Alternatives

If you don’t want to buy your system, there are still other options.   

A solar lease is a third-party financing agreement where the owner of the solar equipment retains ownership and leases it to you. You pay them a monthly fee based on how much electricity you consume, and they cover maintenance costs. As long as the sun shines on your house and there’s enough sunshine to generate electricity, you don’t have to worry about paying anything more than what you would otherwise pay for utility bills or other forms of energy production.  

A solar power purchase agreement (PPA) lets someone else put up all the equipment for your home but allows for net metering: when you produce more energy than your home uses in one month—for example because it’s sunny outside—the excess goes back into an account that can be drawn from later on in times when there isn’t enough sunlight on your roof. It’s essentially like having a backup battery that only works when needed but never needs charging itself!   

With net metering, some states also require companies that supply electrical power through PPAs to give homeowners SRECs (solar renewable energy certificates). These are essentially tradable coupons that can be sold by homeowners who produce their own solar power so that they can get credit for their contribution to reducing greenhouse gas emissions. Even though they’re not actually selling their electricity directly over the counter through this arrangement they are instead trading these certificates —and those will be bought by companies who need credits from green sources.   

Bottom Line

Whether you’re interested in getting loans for solar panels on your home or considering a small-scale solar system to power a remote cabin or other off-grid location, financing has become an important consideration. Solar panel loans are one of the available options for raising the money you need for your project. 

Keep in mind that there are many other ways to finance a solar installation—bank loans, cash sales, and leases are just some of the alternatives available to homeowners who want to go green without taking out another mortgage.  

You should also know that not everyone is eligible for a solar loan. Some lenders have specific requirements regarding income level and credit score that must be met before they will approve your application.   

In conclusion, they do allow you to get solar power without having to spend thousands of dollars upfront or wait years before seeing any savings. Be sure to talk to your financial advisor and lender as well, so you can thoroughly consider all your options.