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Understanding Solar Panel Financing Options

Overview

VELUX is an environmentally-conscious company that is focused on the creation of skylights and roof windows. Today, the company’s product lines include blinds, electronic accessories, solar panels, and shades, in addition to several skylights and roof windows. The company, based in Denmark, aims to help residents and businesses get more daylight and sunlight into their spaces with VELUX products. The company, founded in Denmark, is now officially a group of companies, which has a physical presence in more than 40 countries.

Company website: https://www.veluxusa.com/

Year founded: 1941

Produced in: United States, Denmark, France, Germany, the Czech Republic, Poland, Hungary, Slovakia, the United Kingdom and China

Warranty: 10-year installation warranty plus 20-years on glass, 10-years on product and 5-years on blinds and controls

Type of company: VKR Holding A/S, a limited company wholly owned by foundations and family

The solar panel industry has grown in recent years – as much as 50% annually according to the Solar Energy Industries Association (SEIA).

Much of this growth stems from the passage of the Solar Investment Tax Credit in 2006. The legislation was set to expire in 2015, but it was then extended through 2021. In addition to supportive legislation, solar growth is also attributed to lower installation costs. In the past ten years, the cost to install solar has gone down by more than 70%.

Other reasons for investing in solar panels include the desire to use a clean, renewable energy source, gaining independence from the electrical grid, and avoiding rising standard electricity costs in the future.

There are plenty of reasons to buy in which begs another question. How much does is cost to install solar panels?

How Much Do Solar Panels Cost?

The cost of an average residential system was $40,000 in 2010 (the pre-incentive cost), but this cost has been reduced to $18,000 on average in 2018. According to the Center for Sustainable Energy, the average 5kW residential solar panel system will cost anywhere from $3 to $5 per watt. This puts the price range at anywhere from $15,000 to $25,000, before available tax credits.

When taking the solar tax credit into account, these costs could be reduced. If solar panels are installed before the end of 2019, the owners qualify for a 30% tax credit which amounts to a tax discount of $4,500 to $7,500, respectively. The 2020 tax credit is 26% for $3,900 to $6,500 in savings, and the 2021 tax credit is 22% for a discount of $3,300 to $5,500.

Short-term costs are relatively high compared to long-term maintenance costs. Homeowners can expect to pay $150 on average for an inspection, followed by another $150-$350 for cleaning. These costs vary according to the size of the solar panel system, location, and more.

Different Ways to Pay for Solar Panels

There are a variety of ways to cover the costs of solar panels, and each method comes with its own set of pros and cons. Some of these options include:

Solar Loans

A “solar loan” is simply an installment loan meant to finance implementing solar panels and other solar panel equipment. In fact, a solar loan is technically considered a home improvement loan or personal loan by definition. Several lenders offer loans for solar panels, including LightStream, SoFi, Dividend, Home Loan Investment Bank, and more. There are a wide range of options in the space, so loan terms can vary considerably.

Depending on the lender, borrowers can expect interest rates from as low at 4% to 6%, but these rates can range up to the 36% or more. Maximum loan limits also vary, ranging from as low as $25,000 (Home Loan Investment Bank) up to $100,000 (LighStream). Borrowers can choose repayment terms as short as several months up to 15 years, and there are typically no prepayment penalties. A wide field of options can lead to a great deal on a solar loan, but it’s important to shop for the best offers considering the variability.

Of course, there are downsides to consider. Many offers are unsecured loans. Without collateral, each lender requires an applicant to pass a credit check. Borrowers with great or excellent credit and high income may be more likely to qualify for better terms, but borrowers who lack in either category may be stuck with higher rates and a more expensive loan. Making payments on a high-interest loan will drive the cost of implementing solar panels, especially for a low-credit borrower.

Solar Leases/Power Purchase Agreements

A solar lease is also called a power purchase agreement (PPA). With this option, a solar panel manufacturer company will install the solar equipment, and in return, the home owner agrees to pay a monthly fixed rate to the manufacturer.

A solar lease agreement, or PPA, is beneficial for several reasons. The leasing company, which is often the solar panel manufacturer, will pay for the upfront installation costs and maintenance expenses. The monthly rate paid to the manufacturer may also be covered by energy generation value and savings from the solar panels, effectively paying for itself. Furthermore, homeowners can make money if energy generation value exceeds the cost of the monthly charge.

There are downsides to consider. Homeowners will not qualify for any tax incentives through leasing, and they could miss out on the 30% tax credit on installation costs. Additionally, homeowners do not technically own the solar panels; they are leasing them instead.

Personal Loans

While they don’t come with the “solar loan” tag, many banks and lenders may still offer personal loans to borrowers for installing solar panels. Traditional, unsecured personal loans are a flexible financing option for many different scenarios, including solar panels. Here are more basic details.

Standard personal loans may offer interest rates as low as 5%, and they can push 30% to 36%. Repayments terms are between 1 to 7 years depending on the lender with usually no prepayment penalties. Loan amounts range from $1,500 to $100,000, and some lenders may charge an origination fee.

Similar to the requirements for a solar loan, personal loans require applicants to pass a credit check, and the best offers are usually offered to highly-qualified applicants (high credit score and income). A high rate will increase the cost of the loan and potentially lead to missed payments which can impact your credit profile.

Home Equity Loan or Line of Credit

Homeowners could rely on their equity to pay for new panels. Home equity loans or home equity lines of credit (HELOC) allow owners to borrow against their home value. A lender effectively offers a loan or a line of credit, and the home equity is used as collateral to secure it.

Home equity options can make sense for several reasons. First, they often come with low interest rates, especially compared to other traditional loans because they are secured by home equity. Additionally, consumers may be able to borrow a considerably sum – up to the value of their paid off home, which can easily cover the cost of solar panels. The line of credit options offers flexibility as well.

Home equity solutions come with risks and drawbacks as well. As mentioned, home equity lenders rely on property assets to secure their products. Defaulting on a home equity loan or HELOC could result in the loss of your home in the worst case scenario. Furthermore, borrowers need to actually have equity to their names for this to be an option in the first place. Lenders may also require borrowers to pay closing costs and fees which may be expensive compared to the costs of borrowing a personal loan.

Are Solar Panels Worth It?

It can be challenging to decide whether or not solar panels are worth the cost. There’s plenty to think about. First, how high is your electric bill regularly? Will solar panels reduce this cost? Does your location receive enough sunlight to justify new solar panels?

Most importantly, carefully consider the cost of installing and maintaining solar panels. How are you going to pay for them? There are various way to fund new solar panels, but they all come with their own drawbacks and considerations. For instance, a loan could be a solution, but you will pay interest on the loan for several years. Alternatively, a home equity loan could work, but you put your home at risk as a result.

Finally, think about the impact of solar panels in the long term. Are they going to save you thousands on electricity over time? Will you be living in your home for the next several decades? Will it reduce your footprint? These are all important questions to ask yourself.

Andrew Rombach is a Content Associate for Lendedu – a website that helps consumers and homeowners with their finances.