A guide to solar loans

Installing solar power in your home can reduce your carbon footprint and help you save on energy costs. About 7% of homes in the country are powered by solar energy. And while the price tag depends on variables such as the location, equipment, size of the system, and roof setup, it can cost an average of $30,500.

Because of the steep expense, you might need to take on a solar loan. In turn, it's important to choose the right solar financing option for you. You'll also want to take advantage of the incentives that can make solar more affordable.

Here, let's go over how solar loans work, the requirements, application process, and which alternatives you can consider.

What is a solar loan?

A solar loan helps you finance the purchase of a home solar panel system. As the upfront costs of going solar can be quite sizable, it's often necessary to look into a solar loan.

One option is to secure financing through the solar company, which offers a one-stop shop to finance and install your home solar system. The interest rate on a solar loan can be anywhere from 4% – 17%, and loan lengths are 8 – 25 years. Many allow you to pay off the loan early without getting hit with prepayment penalties.

Depending on the loan provider, you might need to pay closing fees. There might also be a hefty dealer, initiation. or loan fee, which can hover in the range of 15% –30% of the loan amount.

Solar loans can be unsecured and secured. If it's a secured home solar loan, you'll need to provide a form of collateral such as your home. The payment proceeds don't go to you – they go directly to the installer and panel manufacturer.

What expenses does solar financing cover?

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 only for solar panel purchase and installation.

Generally, a solar loan will help with the solar panels themselves. It may also include upgrades such as pole or ground mounts and batteries. However, the loan won’t cover maintenance or energy purchase costs.

As we've talked about, solar loans can cost $30,500 on average, and include closing costs and lender fees.

What are the types of solar energy loans?

Solar loans fall under two main camps: secured and unsecured. It's important to understand how they’re different so you can see which might be the better option for you.

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 lower 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.

One important thing to note: Should the solar lender put a lien on the solar equipment itself, it can impact selling or refinancing your home.¹ This can scare off potential buyers for several reasons. First, it indicates in the title that you might not own the panels, and they can be subject to repossession. They might also not want to have to take on the financial responsibility of paying off the solar loan if they purchase the home.

Unfortunately, many lenders don't want to refinance your property until the lien is lifted. After all, it's perceived as another claim from your creditor.

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. Keep in mind that the lender may not accept your loan application if they think it’s too risky.

Where can I get a solar panel loan?

Available solar energy loans will vary based on where you live. As a general rule, though, here are some of your options:

• Banks and credit unions: Many local banks and credit unions will offer specialized solar panel loans to boost energy efficiency.
• Solar loan lenders: As solar energy becomes more in demand and readily available, there are more companies that specialize in solar panel loans.
• Traditional mortgage lenders: Fannie Mae offers a HomeStyle^®Energy program, while the Federal Housing Administration (FHA) offers an Energy Efficient Mortgage. Both of these programs give homeowners the ability to improve their home’s energy efficiency.
• Local programs and incentives: Many states and even counties or cities partner with private lenders to offer solar panel financing with competitive rates to encourage homeowners to consider more energy-efficient options.

What are the pros and cons of solar loans?

Solar loans can significantly lower your energy costs and even help you turn a profit. But they don't come without drawbacks. You'll want to pore over the potential pluses and minuses and analyze both sides of the situation before applying for financing.

Pros

• Lower out-of-pocket expenses: Solar loans help make expensive solar energy products affordable for homeowners, who don't need to pay for their system up front.
• Potential solar tax benefits: Owning a solar energy system can entitle you to tax credits in some states. Since solar leases and PPAs aren’t eligible for this, homeowners who pursue solar loans may save additional money through these tax breaks.
• Ability to 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 through what's known as net metering, creating a monthly income stream.
• Increased property value: Like a new roof or kitchen remodel, your new energy system could bump up your home value. As a result, you could increase your equity and sell your home for a higher price.
• Environmental benefits: Solar panels generate clean electricity, reducing pollution and the demand for coal.

Cons

• Variable clean energy mileage: The efficacy of solar panels can depend on where you live and the amount of sun exposure your house receives.
• Potential lack of immediate savings: 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 costs: Homeowners looking to profit from owning their solar equipment may not see a positive net return until their loan is fully repaid. This factor means you may not profit or break even with your solar energy system for 5 – 10 years.
• Potential lien: The lender could put a lien on your solar panels, which can ward off would-be buyers and make refinancing a challenge.

How to get a solar loan

Here are the steps you'll want to take to ensure nothing gets missed and you can enjoy a smooth financing process:

1. Estimate your solar costs. Start by doing research online to see how much it would cost to power your home with solar. This is based on factors such as where you live, the complexity of your roof, the size of the system, quality of the equipment, and labor fees.

2. Look into incentives. You can also look into any state incentives available for going solar.

3. See if solar is covered under your homeowners insurance. You'll also want to see if solar panels are covered under your current homeowners insurance policy. If not, see how much changing your coverage can impact your insurance costs.

4. Assess your finances. Taking stock of your financial situation before you apply for a solar loan can help you gauge how much you can afford and what interest fees and terms you can expect. You'll want to look at your credit score, debt-to-income (DTI) ratio, income, and employment. Should your credit score be lower than needed to get approved for financing, look into steps involved to repair your credit.

5. Research multiple lenders. Shopping around for a lender can help you get a clearer picture of what's available in terms of your financing options. Look closely at the lender's rates, terms, fees, and whether you'll need to provide an asset to back the loan.

6. Get prequalified and compare terms. Prequalification means you can get an estimate of the loan amount, rate, and terms for which you'll likely get approved for. The lender will do a soft pull of your credit, which won't impact your score.

7. Submit a formal application. To submit your application for a solar loan, you'll need to provide your basic personal and financial information, and some details about your project such as the size and scope.

Are there other options for solar panel loans?

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 financing options. Keep in mind 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 greater 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 than a home equity loan because they don’t use collateral. In addition, they have shorter terms than other loan products. Compare the differences between a home equity loan versus a personal loan to see which might be better for you.

Energy-efficient mortgages (EEMs)

Energy-efficient mortgages (EEMs), also known as green mortgages, provide financing with favorable terms for energy-efficient home improvements. To qualify, your proposed project must save you more money than it costs. When determining loan eligibility, your lender will calculate these amounts.

You can acquire an EEM through the Federal Housing Administration (FHA), Department of Veterans Affairs (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 than other financing options, saving you money over the lifetime of the loan. However, your home is leveraged as collateral.

Keep in mind that Rocket Mortgage doesn’t offer HELOCs at this time, but we do offer a Home Equity Loan.

Property Assessed Clean Energy (PACE) loans

Property Assessed Clean Energy (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 up to 30 years. And if you sell your home, the PACE loan stays with the property, meaning the new owner will take on the debt.

What are non-financing options for solar panels?

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

Here are the differences between solar loans, solar leases, and PPAs:

Solar lease

With a solar lease, you won't own the solar panels outright. Instead, you work with either a third party or solar panel installer to lease the solar panels for a fixed length of time. Once the lease is up, the lessor will uninstall and remove the solar system.

Lease terms are usually 15 to 20 years. Your monthly payment might be fixed for the life of the loan, or it might increase each year by a set amount. While there's no upfront payment, you are still responsible for paying your electricity bills. However, you might be able to recoup some of the costs if net metering is available in your area.

If you don't want to take out a large loan, or you anticipate selling and moving out of your home down the line, this might be a strong option for you.

PPA

A solar power purchase agreement lets you enjoy solar energy powering your home without needing to outright own it. You'll need to commit to a long-term contract with a third party.

The other party is tasked with installing and maintaining your home solar system, and you pay them back at a predetermined rate. In some PPAs, the rate is set for the entire duration of the contract. In others, it may increase by a small percentage in future years. You get to have access to a low-cost, reliable source of energy for years.

A PPA could be a good fit for you if you don't want to finance a home solar system, nor deal with tending to its ongoing maintenance. And if you prefer to know how much you'll be paying in energy costs, month by month.

More ways to make solar energy more affordable

In addition to solar loans, there are other programs out there that can make solar energy more affordable. Dozens of incentives can help make solar panel systems worth the cost. You should look into the following options to maximize your incentives when having solar panels installed.”

Net metering

If your home is in an optimal spot to absorb sunlight, your panels can create more energy than you 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, but you’ll also receive payment for your energy.

With PPAs and solar leases, because you don't own the panels, the PPA provider or lender receives any net metering credits. In turn, that can be passed onto you in the form of a discounted energy rate.

Federal solar tax credit

Due to recent law changes, the Residential Clean Energy Tax Credit is a 30% federal credit available only to those who installed their solar panels from 2022 through the end of 2025. As a result of these legislative changes, the incentive is scheduled to end earlier than previously expected. If you installed solar panels after December 31, 2025, you won't be able to take advantage of this tax credit.

This applies to homes in the U.S., and to both homeowners and renters. What's particularly nice about this credit is that it has no annual or lifetime dollar limit. It's a non-refundable tax credit, which means if the credit amount is more than what you owe in federal tax, you won't get a refund. However, should you have "excess credit,' it can carry over to future years.

State incentive programs

Solar incentive programs vary widely among states and aren't available in all locations. While one state might offer solar rebates on a first-come, first-served basis, others provide tax benefits. 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. For example, low income, single-family households in the state of New York can scoop up projects to make their homes more efficient, which is capped at $5,000. Moderate-income households are eligible for projects up to $10,000.

Therefore, it’s crucial to check your local and state incentive programs to determine your eligibility.

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.

Utility company incentives

If you don’t meet the eligibility requirements for other incentives, there may still be solar incentives for you to take advantage of through your local utility company.

These incentives can bump down the upfront cost of renewable energy upgrades such as installing solar in your home. They can come in the form of subsidized services, rebates, and bill credits. In some cases they can offer tax credits or tax deductions.

For instance, Austin Energy grants Texas homeowners with solar panels rebates of up to $2,500. In the state of New York, Inflation Reduction Act (IRA) tax credits are available, which can bring down the upfront cost of your solar energy installation.

FAQ

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 foot the bill for the installation of a solar energy system. If your estimated monthly payments are lower than your average electric bill, you could save money on energy. Remember: Maintenance costs can increase your annual expenditure for home solar panels. This can cost anywhere from $390 to $720 per year.

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 17%. A good interest rate for a solar loan is on the lower end – between 4% and 8%. Remember, interest rates for solar loans depend on a handful of factors: Your loan amount, location, credit history, and financial situation. Further, different companies and lenders offer loans with varying interest rates, so it’s best to shop around.

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 repayment terms. Further, evaluating your unique set of circumstances, budget, and preferences can point you in the right direction.

Can you get a solar panel loan with bad credit?

Yes, it's possible to get a solar panel loan with less-than-stellar credit. While the minimum credit score lenders require is 650, in some cases you'll be able to get the green light for a loan with a score of 580. However, getting approved often means higher interest rates and less favorable terms than if you had strong credit.

The bottom line: Is a solar loan a good option for you?

A solar loan can be one option to invest in energy-efficient technologies – but you’re probably looking at an average of $30,500 in upfront costs to install solar panels in your home. A loan could lighten the financial burden and help you acquire sustainable energy.

That said, other financing methods, like personal, home equity, or home improvement loans, can also be a strong route. To determine which form of financing is right for you, you'll want to assess 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 about energy-efficient homes and other improvements you can make so that your home is more green.

¹Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

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