solar financing guide

The biggest difficulty to installing solar in any situation is the up-front cost. It’s the obstacle that prevents solar from capturing a larger share of the energy market across the world, and it’s the main reason why more homeowners don’t install a solar energy system on their home.

Solar is a very attractive long term investment which present a low risk and offers high returns, but upfront costs prohibit many from taking part in it. A typical residential solar energy system size is 5kW. The average cost for this size of solar system is $14,550 according to Energy Sage. That’s certainly not an amount that most homeowners have lying around!

Luckily the Federal Tax Credit offers a 30% tax rebate for all residential PV system installations in addition to other locals and states incentive, cutting that average cost down to approximately $11,495. But still, paying over $10,000 in cash for solar panels is not doable for the large majority of homeowners. And that’s where solar financing and solar loans come in.

In this article we’re going to go over the main solar financing options which is solar loans.

Solar loan

Perhaps the best way to cover the high up-front cost of a new solar system is through a solar loan. Just like any personal loan, you receive the cash upfront to pay for the full cost of the solar panels (minus whatever down payment you make) and then pay it back with interest through monthly payments.

Two Types of Solar Loans: Secured vs Unsecured

There are generally two different routes you can take when looking to take out a solar loan: secured and unsecured. A secured loan is backed by your equity in your home and thus requires a home equity loan or a home equity line of credit (HELOC). An unsecured loan is a more traditional loan that isn’t backed by your equity or assets.

The key difference is that lenders face much less risk with secured loans and thus the interest rate tends to be much lower. But let’s quickly run through both types.

Secured Loan

A secured loan requires that you back the the loan with the equity you currently have in your home. It’s essentially a 2nd mortgage based on the equity you’ve already put into your home. This allows lenders to give you a lower interest rate because they have more protection in case you aren’t able to repay it. But this also means that you could face foreclosure if you are unable to make your loan payments.

There are a few different ways that you can obtain a secured loan, including a traditional 2nd mortgage (home equity loan), a home equity line of credit (HELOC), a Property Assessed Clean Energy (PACE) loan, or a Federal Housing Authority (FHA) loan.

The length of a typical 2nd mortgage is usually 10 to 15 years at an interest rate between 3% and 8%. Fees are usually in the $1,000 range.

Pros

Low interest rate
Maximizes the overall value of your solar panels over the long term
Interest on secured loans is often tax deductible

Cons

Requires significant equity in your home, a good credit score, and favorable debt-to-income ratio.
If your financial situation is not secure, you could face repossession if you can’t make payments
Longer closing times (usually a few weeks)
Will not be able to use your the equity in your home for future projects or purchases

Unsecured Loan

An unsecured loan does not involve putting up your home equity to back the loan. This means that there is more risk for lenders, leading to a higher interest rate. There are many companies that offer unsecured solar loans including Mosaic Solar, Dividend Finance, and Sun Power. Additionally, most (if not all) solar installers have partnerships with unsecured solar loan lenders and can connect you when the time comes.

Unsecured loans are typically 5 to 20 years in length with a wide range of interest rates from 5.5% to 20% or higher depending on credit score. The fees for unsecured solar loans are also typically much higher than for secured loans.

Pros

You don’t have to leverage your biggest asset (your home), freeing it up for other projects or purchases
Instant approval
No risk of home repossession if you default on loan

Cons

Higher interest rates
Typically longer terms
Interest on unsecured solar loans is not tax deductible
Lower long-term value
Higher fees

Which Solar Financing is Right For You?

If you can qualify for a home equity loan and are willing to use your home as collateral, then you should absolutely go with a secured solar loan. The terms (length and rates) are just far better with this route, maximizing the long-term return on investment of your solar energy system.

But if you don’t have significant equity in your home or if you aren’t able to qualify for a secured loan due to credit score or debt-to-income ratio, that does NOT mean you should give up on trying to finance your solar.

Unsecured loans are still an incredible way to eliminate the up front cost of solar. Even with a higher rate, the savings on electric bills will still more than make up for your monthly payments and allow you to reap the rewards of your solar investment.

Contract B: Secured Solar Loan (Home Equity)

Secured solar loans range from 3% to 8.5% interest rates depending on credit score and amount of equity in your home, but we will use 7% as our example APR. Lengths of solar loans vary, but we are going to use an 8 year loan (96 months) so that we can avoid paying a lot of interest over a long time period.

To start, let’s just calculate how much you will pay for your solar panels over the 20 year term assuming you put $0 down and use the 30% Federal Tax Credit. The total cost of the system in this scenario is $10,625 after the tax credit is factored in.

Now we just stick these numbers into a loan calculator to determine the total cost of our solar system after the interest rate accrues over 8 years. The total amount of interest paid is $3,276, so we just tack that onto the original loan amount to get $13,901.

This is the final cost for 25 years of significant solar power! Now we just need to calculate energy savings. As we mentioned, this 5kW system will produce 6,750 kWh per year. And we know that the cost of electricity starts at 11.45 cents and grows at a rate of 3% per year. If we didn’t go solar, what would we be paying on our electric bill for that same amount of energy?

The first year, we save $772.88 on our electric bill. We replaced 6,750 kWh with solar power and didn’t have to pay 11.45 cents for any of those kWh. But the price of energy is expected to rise in the coming decades! If we plug the 3% annual increase in energy prices into a calculator, we find that by 2046, we will be paying $1,571 each year for those same 6,750 kiloWatt hours. The total cost that we wold pay the utility company over those years would be a whopping $28,179.

Calculating Return on Investment For Solar Financing

The most basic calculation we can make here is to subtract the cost of solar energy (what we paid for our solar panels) from the amount of money they’ve saved us on our electric bill over that 25 year period.

$28,179 – $13,901 is $14,278.

That means that you invested $13,901 to install solar and it yielded $14,278. This is a return of 103% or about 4.12% per year. While this may not seem like a whole lot, remember that this is essentially a risk-free investment that comes with all of the other advantages that solar energy brings you (environmentally friendly, not subject to fluctuating energy prices).

But there’s one more thing! We mentioned previously that transitioning to solar energy adds approximately 4% to the value of your home. If your home is valued at $250,000, after you install a solar energy system, it’s now worth $260,000. That’s $10,000 more to tack on to your return on investment.

$14,278 + $10,000 is $24,278.

While this number is definitely a ballpark that depends on the size of your home, electricity rates in your area, and your current home value, around $25,000 is not far from the real return on investment of going solar.

Total Spent on Solar Panels: $13,901

Total Energy Savings and Increased Home Value: $24,278

Final Return on Investment for Secured Solar Loan: 175%

Wrapping Up Solar Financing

When it comes down to it, solar energy is all about the numbers. You want to maximize long-term return on investment based on the financial circumstances you’re currently in and your appetite for taking on short-term debt.

It’s pretty clear that, of all the solar financing options, a secured solar loan is definitely the most lucrative in the long term. Our example scenario showed a secured solar loan means that you could potentially get around a $25,000 return on investment after you pay off your solar loan.

But again, it all depends. It depends on your credit score, whether you want to explore solar loans, and how much ownership you want to have over your solar panel system. Make sure to contact one of our solar specialists to find the option that suits you best: contact@greenoptimhome.com