The majority of households are aware that solar panels have the potential to reduce their monthly utility expenses. However, many cannot afford the $15,000-$25,000 required to purchase a system outright.
The good news is that it is extremely simple to secure a solar loan that will allow you to buy a solar panel system with minimal or no down payment.
This blog will explain how solar loans function and whether you should apply for one.
What is a solar loan?
A solar loan is a loan used to finance the acquisition and installation of solar panels. They provide a method for homeowners to invest in a solar panel installation without making a large initial investment.
Numerous suppliers of solar loans provide zero-down solar loans and alternatives for prepayment without penalty.
Solar loans are often categorised as a subset of home improvement loans. Consequently, they are offered with a variety of payment schemes, terms, and rates.
The instant power bill savings associated with the acquisition of solar panels attracts homeowners to solar loans. The monthly bill savings can then be used to the monthly loan payment.
However, while solar loans are handy, they provide a lesser financial return than cash-purchased solar panel installations.
How do solar financing and the 30% tax credit interact?
Yes, you are still eligible for the solar tax credit if you instal a solar panel system using a solar loan.
The solar tax credit, also known as the Clean Energy Tax Credit, is a federal incentive that allows you to deduct 30% of the entire cost of installing solar panels when filing your taxes.
Numerous solar loans are intended to account for the solar tax credit. Mosaic’s solar loans, for example, allow you to re-amortize (pay down) your loan when you receive the tax credit, so reducing your monthly loan payments.
The most essential solar loan characteristics
Here are the most significant loan characteristics to consider when evaluating solar loans, along with their definitions:
comparing secured and unsecured loans
There are two primary varieties of solar loans: secured and unsecured.
Secured loans are backed by an asset, usually the borrower’s residence. As a result, they often offer lower rates, with APRs ranging from 3-8%. Home equity loans and HELOCs (Home Equity Lines of Credit) (Home Equity Lines of Credit) are the most prevalent forms of this type of loan.
Another example is residential PACE (R-PACE) loans, which are secured by a lien on your property tax. PACE loans are available to borrowers with less-than-perfect credit, but they often carry a higher interest rate than a home equity loan or HELOC.
Unsecured loans, as their name suggests, are made available without collateral. These typically require a decent credit score, and the higher your score, the cheaper your interest rate. A solar loan’s annual percentage rate (APR) might range from 5.5% to 20% or even more.
Solar loan interest rates
Depending on your credit score, secured loans such as home equity loans and HELOC typically carry APRs between 3 and 8.5 percent. APRs for PACE loans range between 6.5% and 8.5%. These rates are typically on the upper end of the spectrum.
The rate range for unsecured loans is significantly greater. In general, the APRs range between 6% and 30% or more. Obtaining a rate on the lower end of the spectrum typically demands a high credit score.
Solar financing down payment requirements
Numerous solar loans are zero-down, requiring no down payment.
In cases when a down payment is required, it is normally between $0 and $3,000.
Solar loan lengths
There are solar loans with terms as little as three years and as long as thirty years. However, loan terms of 10 to 20 years are the norm.
Loan duration and interest rate are inversely connected. Therefore, the longer the loan term, the cheaper the interest rate.
Is a solar loan beneficial?
In the majority of instances, you will save a substantial amount of money by obtaining a solar loan.
When you purchase a solar panel system, whether through a solar loan or otherwise, you boost the value of your home immediately. According to a research by Zillow, solar panels increase the value of a home by an average of 4.1%. For a property worth $500,000, solar panels will add $21,500 in value.
The entire savings and cash flow from a solar loan are contingent on how the loan is structured. Consider two scenarios in which a homeowner would benefit from obtaining a solar loan:
Case 1: Positive cash flow from month one
In many circumstances, the homeowner will be in the black by the end of the first month. Check out the diagram below, which was generated by our solar panel calculator. It depicts a consumer that spends $199 per month for power.
After acquiring solar panels with a zero-down, 20-year loan, their power cost will be just $19, but their loan payback will be $132; they will be $48 ahead overall.
No-money-down solar system estimate
In the preceding illustration, the homeowner receives an asset that generates positive returns from day one without incurring any costs. Installing solar panels in this circumstance is a no-brainer for a homeowner seeking an immediate return on investment.
Case 2: Seeking greatest total savings
Some homeowners may favour overall savings over the panels’ useful life. In solar-friendly areas like California and New York, for instance, the savings from a solar loan can be as high as $100,000.
To attain similar profits, you should choose a solar loan with the shortest contract length available, such as 5 or 8 years. This will result in monthly loan payments equal to or exceeding your monthly electric bill.
While you will not experience a positive cash flow throughout the length of the loan, once the loan has been repaid, your solar panels will provide you with virtually free electricity. And because solar panels are warranted for 25 years, but typically last longer, you will enjoy nearly two decades of free electricity with a 5-year loan.
Even better, government records indicate that electricity rates continually rise over time, so increasing the value of your free electricity.
How to evaluate your cash flow and returns with a solar loan
Our solar panel calculator provides a simple method for determining the predicted cash flow from a solar loan, i.e., how the utility bill savings will compare to your monthly loan payments.
You only need to enter your address and the dollar amount of your most recent monthly electricity bill, and the calculator will do the rest.
The calculator is actually rather complex, taking into account your roof size and orientation, local weather, local utility bills, tax credits, and other solar incentives to generate an extremely accurate answer.
It computes your monthly solar loan payment for the exact system size your home requires, based on local rates and a 4.99% APR, 20-year solar loan.
It also displays utility bill savings over the lifetime of your solar panels, allowing you to easily compare the total savings to the total loan payments.
How to locate the optimal solar loan
Follow these guidelines to secure the best solar loan terms.
If possible, choose a secured loan such as a home equity loan; supplying collateral will result in a reduced interest rate.
Make the largest possible down payment. This will reduce the total amount of your loan and the amount of interest you will ultimately pay.
Aim for zero (or minor) prepayment penalties; the sooner you can pay off your loans, the greater your overall return will be.
If you obtain a tax refund as a result of the solar tax credit, pay down your loans to minimise your future loan payments.
If sustaining a good cash flow is your top objective, you should seek out lengthier loan terms.
If overall savings is your goal, choose the shortest loan time (with the highest monthly payment) you can afford.
Most importantly, comparison shop. There are more solar loan companies and possibilities than ever before; therefore, it is important to conduct research to obtain the best price.
There are more tips available on the Energy.gov website.
Is a strong credit score required to obtain a solar loan?
Not at all Numerous financial institutions will finance solar energy systems for all credit ratings.
The availability of solar loans has expanded. The introduction of new solar lending platforms, such as Dividend Solar, Mosaic, and Greensky. They have made it possible for the majority of local solar installation businesses to offer zero-down financing to clients.
For residents of California and Florida, residential PACE (R-PACE) loans are also available. PACE loans have no credit score criteria at all.
While not required, having a strong credit score has many advantages. It will help you to negotiate the interest rate and open new possibilities.
Are solar loans tax deductible?
The answer is dependent on the type of solar loan obtained.
If the solar loan is secured by your residence, then the interest and fees are tax deductible. This is because the IRS considers home upgrades such as solar systems to be capital projects, i.e. those that raise the value of the home, and hence tax deductible.
Unsecured solar loans, on the other hand, do not qualify for tax benefits.