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Understanding Solar Panel Financing Options

While solar power saves home and business owners money on their electric bills in the long run, the significant up-front cost is a real barrier to entry. Many folks turn to financing plans to get a head start on their electric bill savings.

Financing terms eat into the ROI of solar, so we encourage you to proceed with careful consideration for the ways that solar financing options impact payback period and lifetime electric bill savings. Of the available options, personal loans (in their many forms) make the most sense to us: the end result is that you own your system, which means you're eligible to claim any available incentives for investing in solar.

In direct contrast, we do not recommend leases or rental schemes in any form. These programs involve a third-party company installing solar on your roof, retaining ownership of the system, and billing you for its usage. These programs are fraught with issues: you can't claim any incentives because you don't own the system, and the rate reduction is often a small fraction of the potential savings from owning a system outright.

This article explains the many solar financing options available to buyers, with our honest assessment of which options make sense and which don't.

Direct Purchase: Best Option

First, let's establish a baseline. The most financially advantageous approach to going solar is buying and owning your solar power system outright. If you can afford the up-front cost, there's no reason to choose anything else.

Every option below involves a third party siphoning off a portion of your electric bill savings. By buying and owning your system, you secure the maximum possible value from going solar.

Personal Loans: Recommended

Personal loans are unsecured loans with no restrictions on how funds are spent. "Unsecured" means the loan isn't backed by collateral - if you default, the lender can't repossess your home or the solar system itself. The lender provides funds up front, and you pay them back over time with interest.

Terms are impacted by credit scores. More qualified buyers receive better rates, and therefore save more money in the long run. Shop around for the best terms you can find - banks, credit unions, and online lenders all compete in this space, so it pays to compare offers.

What to Look For

When shopping for solar loans, compare these key terms:

Interest rate

Lower is better. Rates typically range from 3% to 10% depending on your credit score and the lender. Even a 1-2% difference can add thousands to the total cost over the life of the loan.

Loan amount

Make sure the maximum loan amount covers your system cost. Residential systems typically range from $5,000 to $30,000 depending on size and components.

Repayment period

Common terms are 10, 15, or 20 years. Longer terms mean lower monthly payments but more interest paid over time.

Origination fees

Some lenders charge 1-5% of the loan amount as an upfront fee. Factor this into your total cost.

Prepayment penalties

Avoid lenders that penalize you for paying off the loan early. You want the flexibility to pay it down faster if you're able.

Impact on Savings

Here's the reality: loan payments reduce your overall savings from going solar. If your system saves you $150/month on your electric bill, but your loan payment is $120/month, your net savings during the loan period is only $30/month. Once the loan is paid off, you'll capture the full $150/month savings, but you need to factor in those years of reduced savings when calculating ROI.

The math still works out favorably compared to continuing to pay your utility bill, but it's not as strong as owning the system outright from day one.

Solar Loans: Not Recommended (Low Availability)

"Solar loans" are personal loans marketed specifically for renewable energy projects. Some lenders reserve these loans exclusively for solar installations, or offer favorable terms when you agree to use the funds for renewables.

Functionally, they work the same as any unsecured personal loan: the lender provides funds up front, and you pay them back over time with interest.

However, the disadvantage is that solar loans are incredibly difficult to find if you're installing your system yourself (or working with a local installer). Most lenders partner with turnkey installers to offer solar-specific loans, while offering the solar installer a kickback from their profit on origination fees. For DIYers, these loans are typically unavailable. You're better off pursuing a standard personal loan from a bank or credit union, where you'll find better availability and more options to choose from.

Home Equity Loans: Recommended

A home equity loan allows homeowners to borrow against the equity in their home, using the home itself as collateral. This is a one-time loan with a fixed amount, fixed interest rate, and fixed repayment schedule, making it ideal for large upfront purchases like a solar installation.

Home equity loans typically offer lower interest rates compared to unsecured personal loans (often 2-4 percentage points lower) because the lender has less risk. You receive the full loan amount at closing and begin making regular monthly payments immediately.

This structure works well for solar projects, where you need a lump sum to purchase all the equipment and complete the installation in one go. The fixed rate gives you predictable monthly payments, and the lower interest rate improves your long-term ROI compared to an unsecured loan.

The Tradeoff

The downside: defaulting on a home equity loan can result in repossession of your home in a worst-case scenario. This is secured debt, which means the lender has a claim on your property if you fail to repay. Make sure you can comfortably afford the payments before choosing this option.

Like other loans, home equity loan payments will reduce your net savings during the repayment period. However, the lower interest rates mean you'll pay less in total interest, which improves your overall savings.

Home Equity Line of Credit (HELOC): Recommended

A HELOC also allows homeowners to borrow against their home equity, but it works differently than a home equity loan. Instead of receiving a lump sum, you're approved for a line of credit (say, $50,000) that you can draw from as needed. You only pay interest on the amount you actually borrow, not the full credit limit.

This flexibility makes HELOCs better suited for multi-stage home improvement projects, where solar installation may be one piece of a larger renovation. For example, if you're planning a major remodel that includes roof upgrades, electrical panel replacement, and solar installation, a HELOC lets you draw funds as each phase of the project progresses.

HELOCs tend to have higher borrowing limits than standard loans, which can be useful for larger projects like battery-based systems that can easily exceed $20,000-$30,000.

How HELOCs Work

Repayment periods are typically 10-20 years, with variable interest rates that can fluctuate over time. Some HELOCs offer a fixed-rate option for more predictable monthly payments.

Like home equity loans, HELOCs typically offer lower interest rates than unsecured loans because they're secured by your home, with all of the same implications if you default on your payments.

Solar Leases: Strongly Discouraged

Now we get into the options where system ownership is retained by a third party, which is something we absolutely do not recommend.

A "solar lease" describes an agreement where an installer builds a solar panel system on your rooftop, then charges you a monthly fee for the right to use all the power generated by that system.

Here's why this is a bad deal: solar incentives go to the owner of the system, which means that the third party installer has the right to claim any rebates, tax breaks, or other incentives for installing your system. You miss out on these entirely.

The third party essentially becomes your new utility company, at a slightly reduced rate. The third party will split the difference between the cost of utility power and the true cost to generate electricity from solar, taking a cut of those savings as profit for themselves.

Entering a "third-party as utility" agreement comes with all the same drawbacks of dealing with a traditional utility, and some new ones, too:

• You're still susceptible to future rate increases
• The third party may be less reliable and established than a utility provider, leading to concerns about future closure
• The system can be repossessed from your roof if you miss payments
• At the end of the lease period, you'll either have to uninstall the equipment, renew your lease, or purchase the equipment outright.

If no rollover clause is present, your system may produce too much power in low-consumption months (wasteful) and too little power in high-consumption months (forcing you to buy excess from the utility).

The Home Sale Problem

Here's a major issue that lease companies often downplay: if you sell your home, you need to find a buyer who agrees to inherit the contract. This is a massive headache known to cause hangups in the sale process. Many buyers are wary of taking on someone else's lease agreement, especially if they don't understand the terms or if the monthly payments seem high.

If you can't find a buyer willing to assume the lease, you'll need to either buy out the remainder of the contract (often at an inflated cost) or pay to have the system removed from your home prior to sale. Either option can cost thousands of dollars, eating into your home sale proceeds and canceling out any savings the lease provided.

When you own your system, this isn't a problem. In fact, homes with solar power systems sell for 5-6% more on average - so long as the solar panels themselves are property of the homeowner, not leased or rented.

Power Purchase Agreements (PPAs): Strongly Discouraged

Power Purchase Agreements, or PPAs, come with many of the same headaches as leases, just in a slightly different package. The key distinction: under leases, you pay a flat monthly fee and can freely use the system up to its capacity. Under a PPA, you agree to a rate for electricity usage and pay as you go.

Just like your utility, PPAs bill based on usage. That's the only real distinction. The concerns about third-party ownership, reduced savings, vulnerability to future rate increases, and risk of system repossession remain the same.

The home sale problem applies here too: buyers need to agree to inherit the PPA contract, which can complicate or derail the sale entirely. You're stuck with the same choice: buy out the contract, pay for removal, or lose the sale.

The Bottom Line: Own Your System Outright

If you need to finance your solar project, stick with ownership-based options: solar loans, personal loans, or HELOCs. The terms may vary, but the result is the same: you own the system, you claim the incentives, and you lock in lifetime energy savings.

Avoid any financing option where a third party retains ownership of the system. These arrangements reduce your savings and introduce unnecessary complications, while still leaving you exposed to rate increases and other risks.