Solar Financing for Property Owners
So you’ve made the decision to go solar –now it’s time to figure out how you’re going to pay for it. Today, we’re looking back on a past article detailing solar financing options for homeowners to give you the latest information available.
A solar system can be an asset to your property that can save you money, increase its value, and increase your energy independence. There are a number of financing options to help you begin your solar journey and start increasing the value of your home or property. This revamped article will provide a brief introduction to the ins-and-outs of solar loans.
What is a Solar Loan?
Including installation, the average PV system can cost between $15,000 and $25,000, according to the Center for Sustainable Energy. The center estimates it takes an average of six to nine years to recoup the costs. Although the costs of home solar have decreased immensely over the past decade, a standard 5-10kW residential system still constitutes a capital outlay that many homeowners prefer to finance.
A simple way to get capital to go solar is through a loan, which can save you anywhere from 40% to 70% over the lifetime of your PV system. Solar loans offer a way for property owners to invest in a solar system with little to no down payment. Many solar loan providers offer zero-down solar loans and options to pay down a loan early without penalty. Solar loans are generally considered a subcategory of home improvement loans. They are available with many different payment structures, rates, and can vary in term from 1 year to 25 years. The bill savings can then be used towards the monthly loan repayment. However, while solar loans are convenient, overall they offer a lower financial return than PV systems purchased with cash.
Lenders of solar loans include traditional community banks as well as specialty lending platforms. Unlike Power Purchase Agreements or Leases (see below), solar loans help a property owner to fully reap the benefits from various rebates, tax credits, performance-based incentives, and reduced electricity costs.
Secured and Unsecured Solar Loans
Resulting in a wide array of interest rates, term lengths, and credit requirements among loan offerings, solar loans can be either secured or unsecured. Each type of loan product offers advantages and disadvantages that a property owner should consider carefully prior to signing. Secured solar loans you may know today as home equity loans or as a second mortgage. In this case, the lender requires the homeowner to use their home as collateral against the loan. If for some reason the homeowner cannot pay back the loan the lender will place a lien against the home, allowing them to use this asset towards repayment of the loan. If a homeowner has sufficient equity in their home and the time to allow for a home appraisal, a secured loan will offer lower monthly payments, more favorable terms and tax deductions on interest.
Secured loans are less risky for banks to issue and usually offer property owners lower interest rates. For the same reason lenders are more apt to provide loans to folks with less than perfect credit when borrowing against an asset. In many cases, interest paid on secured loans is tax deductible, an impactful benefit if a property owner's tax liability is large enough. Lastly, many secured solar loans do not require any money down on signing or penalize the property owner on payments made ahead of schedule.
If a property owner is not comfortable putting up their home or property as collateral, or if they do not have sufficient equity in their home for a second mortgage, an unsecured loan should be considered. The tradeoff for not providing the property as collateral is often higher interest rates when compared to a secured loan. Similarly, interest paid on an unsecured loan is not tax deductible. If a property owner defaults on this type of loan, the lender will often hire a collection agency and the borrower's credit score will suffer. Zero money down options are also available to property owners exploring unsecured loans. Lastly, as unsecured loans do not use the property as collateral, no appraisal is necessary, reducing the time it takes to secure the loan.
Power Purchase Agreements
If you’re unable to secure a loan, the second way to get capital to go solar is by obtaining a third-party owned system through a lease or power purchase agreement (PPA) offered by some solar installers. In which the PPA provider, or in some case installer, maintains and owns your system.
Solar leases require consumers to pay a fixed or floating monthly payment calculated by assessing the amount of electricity the system produces. With solar PPAs, consumers buy the electricity generated by their rooftop system back from the PPA provider or installer at a fixed or floating rate per kilowatt-hour. Although these arrangements are often offered with no money down, consumers don’t benefit from the rebates, tax breaks, and other incentives available to system owners.
Solar installers should carefully consider whether they want to direct their customer to a traditional bank or a lending platform. Lending platforms are not a bank, rather a channel for independent contractors to access relatively low cost loan products. Furthermore, property owners cannot get a loan directly from a lending platform and only authorized contractors (“dealers”) can offer their financing. The qualifications for becoming a dealer vary by platform, but most require at least 2-years of operation and good business standing. One key difference between a lending platform and conventional bank is the turnaround time. Because they use online tools and have paperless approval processes, lending platforms allow for immediate approval decisions in the home and timely funding for solar projects.
If you have a low credit score, you might also consider special programs such as PACE (Property Assessed Clean Energy). PACE is a government program that finances solar and other projects that increase energy efficiency. The program varies by location, but in many places, property owners can pay for their solar panels through a property tax assessment (so your credit score isn't a factor).
If you’re thinking about going solar, there’s a lot to consider when it comes to solar financing. There are pros and cons of each option to weigh when looking to finance your solar system. But the outcome is well worth it: cleaner, more affordable energy that will greatly increase the value of your property.