White Ranch home with solar panels.

The Quick Guide To Solar Loans

July 24, 2023 11-minute read

Author: Ashley Kilroy

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If you want to save money on electricity and have a greener home, solar power can make you energy-efficient and help your wallet. According to the U.S. Office of Energy Efficiency And Renewable Energy, solar power is more prevalent in the United States than ever, with over 3% of national electricity coming from solar energy. In addition, costs for solar panels have never been lower.

Despite high upfront costs, solar energy can significantly decrease your monthly energy costs and increase the value of your home. However, while the industry’s advances have made access cheaper, solar panels usually cost a homeowner about $20,000. Here’s how a solar loan can help you afford your solar energy project.

What Is A Solar Loan?

A solar loan finances the purchase or rental of a solar panel system for homeowners. The cost of installing a residential solar energy system can easily reach tens of thousands of dollars, depending on the project’s scope. Because the average home solar panel system costs about $20,000, financing is often necessary.

Fortunately, homeowners can get help for this project. Like typical home improvement loans, solar loans provide funding for upgrading your home. The difference is that while home improvement loans cover numerous projects, solar loans are solely for solar panel purchase and installation. As a result, the available financing options make solar panels as realistic and affordable as a new roof or plumbing system.

Key Points About Getting A Loan To Own Solar Panels

A solar panel loan can make you the proud owner of a renewable energy source for your home. Here are the key factors to consider when financing your purchase with a solar loan:

  • You’ll own the solar panels. Just like a mortgage allows you to become a homeowner, a solar loan means you’ll own a solar energy system. Therefore, the upkeep and repair of the system will be your responsibility.
  • Because you’re paying to own the system instead of renting or leasing it from a solar company, your upfront installation costs will be higher. The tradeoff is you won’t make a monthly payment or purchase energy from the solar company once your system is in place.  
  • Incentives available in your area will determine whether your loan payment will be lower than a conventional utility bill. For example, you might receive a tax credit or rebate from your municipality, making solar panels financially advantageous. Solar leases and power purchase agreements (PPAs) don’t grant eligibility for such tax breaks.
  • Purchasing a solar panel system usually qualifies you for a wide range of clean energy incentives, such as the federal solar tax credit. This credit can reduce your income taxes by thousands of dollars.
  • Owning solar panels can increase a home’s value like a typical renovation would. Therefore, increasing your equity can help offset the upfront costs of solar installation.
  • You’ll repay the principal plus interest. So, if your monthly solar loan payment is lower than your typical electricity bill, you’ll save money.

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What Expenses Does Solar Financing Cover?

Solar financing covers the price of the system plus the installation costs. Generally, the loan will help with the solar panels. It also includes upgrades such as pole or ground mounts and batteries. However, the loan won’t cover maintenance or energy purchase costs.

Overview: Tax Credits, Rebates And Other Solar Installation Incentives

Dozens of incentives can help make solar panel systems worth the cost. Homeowners can qualify for the following:

  • If your home is in an optimal spot to absorb sunlight, your panels can create energy you don’t need. Fortunately, net metering means you can sell your excess energy to the grid and profit from the energy your panels generate. Not only will you not pay an electric bill, you’ll receive payment for your energy.
  • The Federal Solar Tax Credit lowers the taxes of homeowners who purchase solar panels with cash or a loan. Specifically, if you purchase solar panels from now through 2032, you can reduce your federal income taxes by 30% of your solar loan. So, a $20,000 solar loan would create a $6,000 rebate. Solar loans in 2033 will grant a 26% reduction, then a 22% reduction in 2034. After that, the legislation granting rebates will expire.
  • Solar incentive programs vary widely among states and aren't available in all locations. For example, your state might offer solar rebates on a first-come, first-served basis, while others provide tax credits differing from the federal solar tax credit. For example, Michigan's Alternative Energy Property Tax Exemption means the value of your solar panels won't increase your property taxes.

    Additionally, some incentives are exclusively for low-income residents and have income eligibility requirements. Therefore, it’s crucial to check your local and state incentive programs to determine your eligibility.

    Plus, your local utility company may provide a solar incentive. For instance, Texas utility companies grant homeowners with solar panels rebates as high as $2,500.

    Lastly, your state may have a Solar Renewable Energy Certificate (SREC) program mandating it to use a specific amount of clean energy. These states often purchase solar-generated electricity from homeowners to meet the quota. Therefore, surplus energy from your system can provide hundreds of dollars of monthly income. 
  • The Database of State Incentives for Renewables & Efficiency® can help you find local programs for solar loans. For example, California residents can get a rebate of up to $5,000 for powering their attic fans with solar energy.

What Are The Types Of Solar Energy Loans?

A plethora of solar loans are available for homeowners. The loan process and details for each differ between products, so it’s a good idea to familiarize yourself with the options.

Secured Solar Loans

Secured solar loans work similarly to secured loans of other types. For example, you can get a secured loan from the company installing your solar panels or from a bank. This financing option means providing collateral for the loan. If you secure your loan with collateral, such as a car or the solar energy system itself, you’ll receive a lower interest rate. This can bring down your overall costs. Plus, you have a higher chance of acquiring the loan. However, falling behind on the loan means losing possession of your collateral.

Unsecured Solar Loans

An unsecured solar loan doesn’t require collateral. As a result, you won’t risk your possessions by taking on this loan. However, you’ll have a higher interest rate, and the lender may not accept your loan application if they think it’s too risky.

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The Pros And Cons Of Loans For Solar Panels

Solar loans can transform your energy costs and even help you turn a profit, but they have drawbacks as well. It’s recommended to analyze both sides of the situation before applying for financing.

Pros

  • Borrowing means lower out-of-pocket expenses: Solar loans help homeowners afford otherwise expensive solar energy products and increase their home value without paying for their system upfront.
  • Borrowers may be eligible for tax benefits: Owning a solar energy system may entitle homeowners to tax credits, like the federal solar tax credit. Since solar leases and PPAs aren’t eligible for this, homeowners who pursue solar loans may save additional money through these tax breaks.
  • Solar-powered systems can generate energy and income: In addition to generating your home’s energy – and potentially eliminating your energy bill – solar panels can also earn money for their owners. If you generate an excess of electricity, you may be able to sell it to your utility company, creating a monthly income stream.
  • Solar energy systems boost property value: Like a new roof or kitchen remodel, your new energy system will bump up your property value. As a result, you could increase your equity and sell your home for a higher price.
  • Do your part for the environment: Solar panels generate clean electricity, reducing pollution and the demand for coal.

Cons

  • Your clean energy mileage may vary: The efficacy of solar panels can depend on where you live and the amount of sun exposure your house receives.
  • You may not save money right away: While some solar energy users will see a decline in utility costs, monthly loan payments could make solar energy just as expensive as traditional energy resources depending on the interest rate, loan amount and loan length.
  • Interest puts a dent in your bottom line: Homeowners looking to profit from owning their solar equipment may not net a positive return until their loan is completely repaid. This factor means you may not profit or break even with your solar energy system for five to ten years.

How To Get A Solar Loan

Solar energy system providers and traditional lenders offer loans for installing solar panels. Remember these factors when applying for financing:

  • It’s best to shop around for a solar loan, so contact multiple funding sources to get an idea of what’s out there. After receiving multiple offers, you can select the one that best fits your financial situation and goals. That may be the lender with the lowest interest rate or least expensive down payment (which can be as low as $0). In addition, you may want to avoid origination and prepayment fees, meaning it costs less to get the loan and you won’t suffer a penalty for paying the loan off early.
  • Your credit score will determine your loan terms and eligibility. Specifically, you typically need a credit score of at least 600, with higher scores garnering better rates. However, the credit requirements will depend on the lender. Strengthening your credit before applying can help you qualify for a loan or save thousands of dollars over the long haul.

Solar Loans Vs. Solar Leases And Power Purchase Agreements

Solar loans are one way to install solar panels on your home. However, if you want to avoid debt, solar leases and power purchase agreements (PPAs) allow you to start generating solar power without owning any equipment or finding financing.

Solar Leases Simplified

Just like leasing a car means driving it without owning it, a solar lease means you have solar panels on your home without having ownership. Here are the key points on solar leases:

  • Homeowners don’t own the solar panel system. Therefore, you don’t need to repair or maintain it.
  • You don’t need a down payment or financing to procure a solar lease.
  • You’ll owe flat monthly payments to use the electricity your panels produce. You can think of this cost as your energy bill, except you don’t pay by usage. Instead, you pay a predetermined fee your contract dictates.
  • If you plan on moving in a few years, you can end the lease when you’re ready to move. However, you must get a flexible contract to do so. Otherwise, you might be stuck for 10 years or more with a lease that charges hefty fees for exiting the contract early.
  • On that note, it’s crucial to give close attention to the lease terms. Specifically, there may be additional maintenance costs, early termination penalties or an escalator clause (which raises your monthly payments as the lease continues).
  • Generally, homeowners don’t receive tax incentives or other financial advantages from solar leases. Instead, the solar company usually reaps the tax benefits of their renewable energy products.

Solar Power Purchase Agreements (Solar PPAs) In Brief 

Likewise, a solar PPA helps you take advantage of solar energy without owning the system. Here are their similarities and differences with leases:

  • The homeowner doesn’t own the panels or equipment.
  • PPAs don’t require upfront costs.
  • Homeowners pay based on electricity usage instead of a fixed rate. However, your payment rate may increase over time if your contract includes an escalation clause.
  • Like a solar lease, your PPA contract could span 5 – 20 years, impacting your plans to sell the home.
  • Homeowners can receive credit from the solar company for selling excess energy back to the grid, lowering their monthly bill.
  • Similar to a solar lease, solar PPAs don’t grant incentives.

At A Glance: Solar Loans Vs. Solar Leases And Power Purchase Agreements

Solar Panel Loan

Solar Lease

Power Purchase Agreement (PPA)

The homeowner owns the solar panel system

Yes

No

No

Low or no upfront cost

No

Yes

Yes

Simplifies selling the home

Yes

No

No

Homeowner may be eligible for government and utility company incentives

Yes

No

No

Stabilizes utility costs

Yes

Yes

No

Provides renewable energy

Yes

Yes

Yes

Are There Other Solar Panel Financing Options?

Outside of solar-specific loans, other alternative financing options may move the needle on your solar energy project. From personal loans to energy-efficient mortgages, here are the various financing tools to consider. Remember, you could combine these loan products with a credit card with excellent points or rewards, splitting the debt load between the two debt instruments. Note that not every lender offers these products or honors every program available.

Personal Loans

If you have plans for your home beyond the solar project, a personal loan could offer more flexibility and support. You can get a personal loan from your bank or credit union and use it to finance almost any home improvement project. However, these loans typically have higher interest rates because they don’t use collateral. In addition, they have shorter terms than other loan products.

Energy-Efficient Mortgages (EEMs)

Energy-efficient mortgages EEMs, also called green mortgages, provide financing with favorable terms for energy-efficient home improvements. To qualify, the homeowner’s proposed project must save them more money than the project costs (your lender will calculate these numbers when determining loan eligibility). Homeowners can acquire an EEM through the FHA, VA or a conventional lender.

Home Equity Loans And HELOCs

Home equity loans and home equity lines of credit (HELOCs) allow you to turn your equity into financing for solar panels and other home improvement projects. These options typically offer lower interest rates, saving you money over the lifetime of the loan. The downside is they leverage your home as collateral, so if you can’t fulfill payments and end up defaulting on the loan, you could potentially lose your house. Plus, if you take out a HELOC, you’ll likely receive a variable interest rate, meaning your monthly payment will fluctuate. Keep in mind that Rocket Mortgage® doesn’t offer HELOCs at this time.

Property Assessed Clean Energy (PACE) Loans

PACE loans are funded through government programs that partner with private lenders. Borrowers don’t make monthly payments with this loan. Instead, you’ll pay the cost of the solar energy project over a set number of years as an assessment on your home’s property taxes, leading to a higher tax bill. The repayment period is usually 10 – 20 years. In addition, if you sell your home, the PACE loan stays with the property, meaning the new owner will take on the debt.

FAQs: Solar Loan Terms, Interest Rates And Structure

You might have a few questions after digesting all this information. Here’s a rundown of commonly asked questions homeowners have about solar loans.

Is it worth getting a loan for solar panels?

A solar loan means taking on a monthly debt payment to finance the installation of a solar energy system. If your estimated monthly payments are lower than your average electric bill, you could save money. Remember, maintenance costs can increase your annual expenditure for home solar panels.

Do banks offer loans for solar?

You can get a solar loan from your bank in the form of a personal secured or unsecured form. In addition, a lender might offer an EEM or PACE loan. Plus, your mortgage lender may provide a home equity loan or HELOC to finance your solar project, depending on their product offerings.

What is a good interest rate for a solar loan?

Interest rates for solar loans vary greatly – from about 4% to as high as around 36%. Therefore, a good interest rate for a solar loan is on the lower end – between 4% – 8%. Remember, interest rates for solar loans depend on your loan amount, location, credit history and financial situation. In addition, different companies and lenders offer loans with varying interest rates, so it’s best to shop around.

How long is a typical solar loan?

Your solar loan will likely take 6 – 20 years to repay. You can get ahead of your payments and pay off the loan early – just watch out for prepayment fees.

What is the best way to finance solar?

Financing your solar energy system depends on your unique financial situation. Generally, it’s best to look for low interest rates, minimal fees and generous terms. In addition, evaluating your circumstances can point you in the right direction.

How are solar loans structured?

Solar loans are similar to home improvement loans and other financial products. Specifically, your solar loan will have an interest rate and payment period. In addition, your loan may include collateral and origination fees. Lastly, borrowers with higher credit scores will receive better terms.

The Bottom Line: Whether To Apply For A Solar Energy System Loan Is Your Call

A solar loan is an excellent way to invest in energy-efficient technologies – but you’re probably facing $20,000 in upfront costs to install solar panels in your home. Therefore, a loan will lighten the financial burden and help you acquire sustainable energy.

However, other financing methods, like personal home equity or home improvement loans, can also be suitable. To determine which form of financing is right for you, we recommend considering your home’s size, location and traditional energy usage to determine the scale of your project.

Want to save money and lower your carbon footprint? Learn whether solar panels are worth it financially and environmentally.

Need extra cash for home improvement?

Use your home equity for a cash-out refinance.

Headshot Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.