What Is a Solar Loan?

Written by Jordan BlansitReviewed by Nathan Brown, CFP®Updated: 8th Apr 2022
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Solar panels can save you hundreds or even thousands on your electric bill every year. Unfortunately, they aren’t cheap. Depending on factors like your location and the square footage of your roof, you can spend anywhere from $10,000 to $40,000 outfitting your home.

For most of us, five figures is a huge chunk of change we don’t just have lying around. But don’t fret if you can’t afford to pay for your solar energy system in cash – you may qualify for financing like solar loans or leases.

What Is a Solar Loan?

A solar loan is a loan that helps homeowners pay for the purchase and installation of solar panels for their home. With a solar loan, homeowners can invest in a solar energy system without coughing up the tens of thousands needed to buy a system outright.

How Do Solar Loans Work?

Solar loans allow homeowners to pay for their solar panels and installation costs upfront and then pay down their loan over several years. Because solar loans are generally considered a type of home improvement loan, they may come with different payment structures, terms, and rates than personal loans. Some even offer zero-down payment and prepayment options.

>> More: Best Home Improvement Loans

Pros and Cons of Solar Loans

Pros:

  • Spreads the cost of solar panels over several years
  • You may qualify for tax credits that effectively lower the cost of your loan
  • Increase the value of your home immediately
  • Decrease your utility bill or even make a profit selling your excess electricity

Cons:

  • Taking out a loan reduces your total savings
  • The cost efficiency of your system varies based on your location and sun exposure
  • You may have difficulty selling or refinancing your home based on your loan or lease arrangement
  • You may need additional homeowner’s insurance to cover solar system damage

Different Types of Solar Loans & Financing Options

Secured Solar Loans

Some solar installation companies offer direct financing via secured solar loans. These loans use your solar energy system as collateral, meaning the company can repossess your panels if you default. But because they’re secured, they often come with lower interest rates than other types of loans.

Unsecured Personal Loans

Banks, credit unions, and online lenders of all stripes market personal loans that you can use for any purpose. Some even offer unsecured personal loans with fixed interest rates specifically marketed to pay for solar systems.

Most unsecured personal loans offer quick access to cash, and many have done away with pesky origination fees. While you may pay a higher interest rate compared to a solar loan, the bank won’t repossess your panels if you default. (At least, not right away.)

That said, unsecured loans usually have stricter qualification requirements than their secured counterparts. If you have a poor credit history, bad credit score (see best bad credit loans), or lots of debt, you may struggle to find an affordable loan.

R-PACE Solar Loans

Residential Property Assessed Clean Energy Programs, or R-PACE solar loans, are debts funded through government partnerships with private lenders. Essentially, you bundle the cost of your solar panels with your annual property tax payment. Most homeowners end up paying higher property taxes for 10-20 years to repay their loan.

Unfortunately, R-PACE loans are geographically limited. Additionally, they can make reselling your home a struggle if the buyer refuses to take over the loan payments.

Fannie Mae HomeStyle Energy

Fannie Mae is a government-sponsored enterprise (GSE) that sets guidelines for and purchasesconventional mortgage loans around the country. Aside from their regular purchase programs, they also offer the HomeStyle Energy program to help homeowners go green.

A HomeStyle Energy mortgage allows homeowners to refinance some or all of the cost of energy-efficient home improvements (like solar systems) into their loans. The program is also available to homebuyers who want to fund clean energy upgrades valued at up to 15% of the home’s worth.

Mortgages often come with lower interest rates than personal loans, secured or not. But bear in mind that you’ll be paying interest on the loan for the next 15-30 years, which may greatly increase your total loan costs.

Home Equity Loan

If you own enough equity in your home, you might be able to take out a home equity loan to cover the cost of your solar panels. These loans come with a lump sum payout and fixed interest rates (usually), simplifying the repayment process. But if you can’t repay your loan, you risk losing your home.

Home Equity Line of Credit

Another way to tap your home equity is with a home equity line of credit, or HELOC.

Think of HELOCs like a credit card with a larger loan limit and the added risk of losing your home if you don’t pay your monthly bill. This revolving credit line is secured with the equity in your home and typically comes with a 10-year draw period, during which you can withdraw funds. Then, you’ll have 10 to 20 years to repay your loan with interest.

You can use HELOCs to pay for a solar energy system and other home improvements. Plus, if your solar panels “substantially improve” your home, you may be able to write off the interest on your taxes.

>> More: See the Best HELOC Rates

Green Mortgages

If you’re buying or refinancing your home, you may also opt for an energy-efficient mortgage (EEM), also known as a green mortgage. EEMs “top off” your mortgage or refinance loan with additional funds to buy and install solar panels or make other energy efficient improvements.

However, you may have to meet several requirements to qualify, including strict credit score or debt-to-income (DTI) ratio minimums. Plus, you’ll have to hire an energy consultant to examine your home and estimate your potential energy savings.

Solar Leases

Solar leases let you enjoy the perks of owning solar panels without purchasing them yourself. Under these arrangements, a business installs and (sometimes) maintains a solar energy system on your property. You get to use the energy that the panels generate, and in return, the business receives a monthly payment.

Solar leases can be a great way to reduce your carbon footprint. However, you may end up actually increasing your living costs compared to your usual electricity usage, as leases can range from $50 to $250 per month.

Power Purchase Agreements

Power purchase agreements (PPAs) offer another way to benefit from solar panels without buying them yourself. Under a PPA, the solar company installs and maintains your system while retaining ownership of the panels. Then, you purchase the power produced at a competitive rate.

While you may save very little or break even compared to your usual electric bill, you can rest easier knowing that you’re reducing your carbon footprint.

Community Solar Programs

Many communities offer local solar programs to help homeowners purchase or offset the cost of solar panels. The specifics vary between communities, but you may be able to:

  • Sign up for on-bill financing programs from your local utility company
  • Get low-interest loans, rebates, or other incentives by way of state and local solar power programs
  • Rent a solar panel in an offsite solar array in return for a credit on your bill equal to the power “your” rented panel produces

Is a Loan for Solar Power Worth It?

For many homeowners, taking out a loan is the primary way to install solar panels without spending years saving. But whether the cost is worth it depends on the value you place on lowering your carbon footprint, as well as the savings you’ll accrue over time.

For instance, while buying solar panels may net you some hefty federal tax credits or local rebates, you may still pay more on the loan than you do for your monthly electrical use. However, most homeowners save thousands long-term – even with the loan – thanks to reduced lifetime utility costs.

Additionally, if you live in a location with limited sunlight, you may not produce enough electricity to fully offset your bill. But most homeowners in the United States stand to break even, or even make money selling the excess electricity back to the utility company. Plus, solar panels can greatly increase the value of your home, potentially translating into bigger profits when it comes time to sell.

Is a Solar Loan a Personal Loan?

Solar loans are typically considered home improvement loans as they increase the value of your home. However, you can also get personal loans or tap the equity in your home to cover the purchase of your solar panels.

Is It Smart to Finance Solar Panels?

As with any loan, there are pros and cons to financing your solar panels.

To start, while you won’t have to cough up the cash up front, you’ll still be on the hook for your principal and interest payments. This can increase the cost of your solar panels substantially over the life of your loan. Plus, not all lenders offer generous rates and terms, so you should shop around before committing to any one loan.

But if you can afford the payments, financing solar panels can still pay off in the long run, especially if you remain in the house for several years.

Bottom Line: What Is a Solar Loan?

Paying cash is ideal most of the time, but it’s not always feasible – especially when you’re staring down a $20,000 bill. While you have options like leases and power purchase agreements, you’ll typically see the highest savings with a solar loan.

Plus, it’s rare to find a loan that helps you decrease your reliance on the electrical grid, minimize your carbon footprint, and increase your property’s value all at once.

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Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.