As the world moves towards more sustainable energy sources, solar energy has emerged as a frontrunner. Solar energy systems harness the sun's energy and convert it into electricity, providing a cleaner, greener way to power your home. Solar panels can reduce or eliminate your electricity bill and the investment can also increase the value of your property.
However, installation costs that can run into the thousands of dollars put many homeowners off. This is where solar financing comes in, allowing you to benefit from the savings of solar energy without the high upfront costs. This article looks at the solar finance options available to help you make the best choice.
Solar Panel Options
Most solar companies offer multiple financing options. Each option affects your total number of installations, solar incentive eligibility, and return on investment (ROI). The following three are the main ways to get solar: Cash, Lease(PPA), and Loan
Cash purchase
Choosing a cash purchase means paying the full cost of the solar system at once, with no additional interest or fees. The higher initial investment can be daunting for some families, requiring a significant amount of cash, with the average cost in the US being around $15,000 to $25,000.
A cash purchase gives you full ownership of the solar system and your payback period will start sooner. At the same time, you are eligible for solar incentives and credits to offset the cost of your system. For example, the federal solar tax credit offers first-time solar owners a tax credit equal to 30% of the cost of the installation. Your state may offer various forms of rebates and incentives.
Solar Loans
If you want to own a solar energy system, but can't afford the large payments, you can take the pressure off by taking out a loan. A solar loan allows you to spread the cost of your solar energy system over a fixed monthly payment, rather than paying the entire amount in one lump sum. However, the interest rate and term of a solar loan will vary depending on factors such as the borrower's credit score, the loan amount, and the term of the loan, and an excellent credit score may allow you to make little or no deposit. As with a cash purchase, you are eligible for incentives and rebates.
Solar Leases
Solar leasing is an alternative when a cash purchase or solar loan is not possible. The solar company enters into a lease agreement with the customer, allowing the customer to use the system through monthly rentals instead of paying the full cost of the solar system. Typical lease terms range from 10 to 25 years. During the contract period, the solar company is responsible for maintaining the system, so customers don't have to worry about the cost of maintaining the system. Most companies offer warranties that include regular repairs, maintenance, and power generation guarantees. The power output clause guarantees that your system will produce a certain amount of power, or that the company will be responsible for repairing or replacing your panels.
However, leasing does not give you ownership of your system, which prevents you from taking advantage of cost-saving solar incentives. Solar leasing can also cause problems if you plan to sell your home.
In a previous post, we discussed whether to buy or lease(PPAs) solar. In this guide, we'll tell you everything you need to know about solar loans to make sure you choose the financing option that best suits your needs.
Type of solar loans
Solar loans come in different combinations, structures, and terms, just like other financing options.
Secured vs Unsecured loans
A secured loan requires collateral, usually your home. This reduces the risk to the lender, and if the borrower is unable to repay the loan, the lender can repossess the collateral to cover losses. As a result, secured loans tend to have lower interest rates.
Unsecured loans do not require collateral to be approved, so the loan amount may be limited and interest rates are usually higher than secured loans, making this type of solar panel finance expensive. However, this loan can be approved very quickly - often in as little as one day!
Home equity loans and HELOCs
If you have a significant amount of equity in your home and are willing to use it as collateral to obtain solar financing, you may also want to consider a home equity loan or home equity line of credit (HELOC).
Borrowers can obtain a larger loan based on the equity in their home, usually based on a percentage of the home's equity. The advantage of a secured loan is a lower interest rate, but the disadvantage is that if you default on the loan for any reason, the lender can repossess your home to pay off the loan. Home equity loans also have additional tax benefits, as the interest you pay is tax deductible. Most home equity loans come with a fixed interest rate, fixed term, and fixed monthly payments.
A home equity line of credit (HELOC) allows borrowers to borrow a certain amount based on the equity in their home, usually determined by the market value of the home minus the balance of the existing mortgage. A HELOC offers flexibility in that the borrower can use the line as needed over time, similar to using a credit card where you can withdraw money as needed and only pay back what you spend. Most HELOCs allow you to make interest-only payments while the loan is in use, so your payments will be low for the first few years. However, HELOCs tend to have variable interest rates, so they may not offer the greatest financial benefits in a rising interest rate environment. The interest you pay on your HELOC may also be tax deductible.
However, the application process for both types of loans is more complicated.
How do solar loans work?
Application and approval
Borrowers can apply for a solar loan from a financial institution, solar company, or specialist lender. The application process may include filling out an application form, providing personal financial information and property information, etc. Once the application is submitted, the lender will evaluate the borrower's credit history, income liabilities, etc., and decide whether to approve the loan application.
Loan amount
When a loan is approved, the borrower receives a certain amount of money to purchase and install a solar energy system. The loan amount can cover all or part of the cost of the solar system.
Finance term
The financing term is simply another way of saying "loan term," "loan length," or "loan contract," the period over which the borrower is required to repay the principal and interest of the loan within a specified period. The choice of loan term takes into account factors such as the borrower's financial position, the needs of the project, the borrower's ability to repay the loan, and the borrower's appetite for risk. This will affect your interest rate, the amount of your monthly payments, and how much you end up saving by going solar. The term can be short (like a few months) or long (like several years or even longer). The longer the term of your loan, the more interest you'll pay, which can eat into your savings.
Loan fees
Solar loans are structured differently from traditional loans and may include some special fees in addition to the regular closing costs. These include dealer fees, similar to a mortgage origination fee, which are usually charged by the dealer selling the solar system. These fees can be a fixed amount or a percentage of the total solar loan amount.
- Dealer Fee: Also known as an initiation fee, loan fee, or lender fee, solar lenders sometimes charge an additional fee to cover their loan risk. There is no industry standard for dealer fees, and the amount may vary depending on factors such as the lender and the size and complexity of the solar system. For this reason, it's important to understand dealer fees before applying for a solar loan. Dealer fees can be as high as 30% of the total cost of the loan, which can add significantly to the cost of the loan. They often catch homeowners off guard, and it's important to ask about the amount of dealer fees ahead of time to help you assess whether a loan is right for your financial situation and avoid unnecessary financial stress. If dealer fees are too high, you may want to consider applying for a home equity loan or HELOC or consider applying for a personal loan with no origination fee.
- Closing fee: Sometimes your solar loan may be subject to a closing fee, which is used to cover the loan provider's costs of administering and servicing your loan. This includes document processing, registration, and legal fees.
Buy、loan or lease solar
How would you choose between the three types of solar finance? Please make your judgment based on the following:
It makes sense to buy a solar loan if:
- You have sufficient cash to cover the full cost of the solar system.
- You want the highest return on investment (ROI) from your solar system, and a cash purchase allows you to benefit more from the system's long-term savings.
- You want to take advantage of ITC and other tax incentives and rebates.
- You want to take full ownership of your solar system immediately.
- You want to reduce your financial risk; not needing a loan also means no future interest rate rises or repayment problems.
It makes sense to apply for a solar loan if:
- You don't have enough money for a cash advance to pay for a solar system.
- You still want to make greater energy and financial savings. If the expected return on investment for the solar system is higher than the interest rate on the loan, applying for a loan can help you use the long-term savings from the system to cover the interest on the loan.
- You want to take advantage of ITC and other tax incentives and rebates.
- You want full ownership of your solar system.
A solar lease or power purchase agreement (PPA) makes sense if:
- You don't expect the highest return on investment (ROI) from your solar system.
- You are not willing to bear the maintenance costs of a solar system.
- You don't qualify for ITC or other tax incentives.
- You don't want to get into financial risk, solar leases or PPAs often transfer the risk of operating and maintaining the system to the solar provider or leasing company.
- You are not concerned about fully owning your solar system at the end of the lease term or Power Purchase Agreement (PPA).
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