Top 3 Solar Panel Financing Options (Tips to Maximize Your ROI)

Paying for Solar Panels in Cash

For homeowners who wish to maximize their savings, paying in cash is the optimal way to go. After all, by buying a residential solar power system outright, you’re essentially paying in advance for 25 to 30 years of electricity to use in your home.

This means your home energy rates are locked in for decades, and you don’t have to worry about inflation or rising utility costs. The big problem with paying in cash is that the upfront system cost of solar power equipment tends to be fairly high.

Even when you take into account incentives like federal tax credits and rebates, you’re looking at an investment of at least $13,986 to $27,972. This isn’t going to be feasible for every homeowner, not to mention that the full ITC won’t be available to all customers.

Solar Panel Loans

Another option is to borrow money from a solar lender, using it to finance your solar installation, then paying it back over time. The most common types of solar loans include unsecured personal loans, home equity loans (or home equity lines of credit), home improvement loans, and in-house financing through your solar panel installation company.

If you choose a loan as your solar financing route, pay special attention to your annual percentage rate (APR), origination fees and loan terms. How much you pay in interest, fees, and your repayment period will often increase the overall cost of your renewable energy system.

However, rest assured that homeowners who finance their systems with a loan are still eligible for the federal government’s solar investment tax credit (ITC)—an average potential value of $8,991—which may make it a bit easier to pay off that loan. Some states and local governments have low-interest rate loan programs for clean energy systems that you can take advantage of, such as Property Assessed Clean Energy (PACE) loans.

Borrowers sometimes have solar programs as well, like Fannie Mae’s HomeStyle® Energy mortgage. If you’re interested in paying for a solar installation via a loan, make sure you research all low-interest financing options available to you.

Additionally, with congress recently passing the Inflation Reduction Act, there will be a significant expansion in government loans for solar energy systems.

Leasing Solar Panels

Homeowners may also choose to either lease their solar panels or participate in a power purchase agreement (PPA), through which you buy the electricity the panels on your roof are producing. Solar leases and solar PPAs are pretty similar, but with one significant difference:

A solar lease means you’re making fixed monthly payments to use solar panels and other solar equipment, whereas a PPA means you’re making monthly payments simply for the electricity produced by solar panels. Naturally, the amount of electricity may fluctuate quite a bit from month to month.

Solar leases can seem attractive at first, but for most homeowners, they don’t make much financial sense. One reason for this is that homeowners in PPAs or leases are not eligible for the federal solar tax credit—an average value of close to $9,000. Another thing to note is that solar leases don’t enhance your property values, which can be one of the big financial incentives of a residential solar system. Other financing options will allow you to save a lot more money in the long run.

With that being said, one of the best ways to save money with solar panels is through net metering, which is a policy where you’re compensated for all excess energy you export to the grid. A good net metering rate makes it easier to pay off your panels and even see a quick return on investment on your system, while a poor net metering rate extends your payback period and cuts into your long-term savings. With California recently rolling out net metering 3.0 and many states following suit, the benefits from NEM are declining. As such, the overall savings associated with solar is expected to dip in the near future, which means the value will also go down a bit.

As a result, we expect solar leases and PPAs to become more popular as the value of cash purchases and solar loans will go down. These low-cost options will also make solar more affordable upfront. Cash purchases and loans will still be more beneficial, but they won’t be as widely available.

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How Do These Solar Financing Options Compare?

Solar panels can be expensive, and deciding whether to pay with cash, choose solar financing or sign a solar lease can be confusing and a bit stressful. The short answer is that all of these options have their upsides and drawbacks, so it’s up to you to decide which is right for you.

Generally speaking, cash purchases are the best option because they save you the most money in the long run. Solar loans are a great alternative, and signing a solar lease should typically be avoided, although they do have their place in the solar industry, especially as NEM changes for the worse throughout the U.S.

In the following sections, we’ll explain some of the pros and cons of the different solar financing and payment options to help you decide which options work for you and which don’t.

Paying in Cash: Pros & Cons

As you can see in the chart above, paying cash for your solar panels provides the greatest long-term value. However, it also requires the most significant amount of money upfront, so many people are unable to go this route.

The average cost of solar panels is around $29,970 before the federal solar investment tax credit (ITC) or $20,979 after the 30% credit is applied. This is assuming the national average cost of solar panels of $3.33 and the average solar system size of 9 kilowatts (kW).

If you’re able to afford this upfront cost, you stand to save thousands of dollars that would otherwise cover the interest over the lifetime of a solar loan. Paying in cash also allows you to begin saving money right away with your solar production rather than waiting for your monthly energy savings to cover your loan payments. Below, we’ll include some pros and cons of paying for your solar system with cash.

Pros

• No interest paid, meaning lower overall costs
• Start saving money right away on your monthly electric bills
• Maximize your return on investment (ROI)
• Take advantage of solar tax credits
• Boosts your home value

Cons

• High upfront cost

Financing Solar Panels: Pros & Cons

Most homeowners choose to finance their solar power systems rather than pay with cash due to the high upfront cost of installing solar. Solar panel loans let you defer the total price of your solar panel system and pay it back over a period of several years, usually between five and seven years.

The primary downside to this option is that you’ll end up paying interest every month, which means you stand to save less over time than if you paid with cash. Solar loans average between 5% and 10%, which cuts into savings each year.

Of course, solar loans come with major upsides, too, like far less money required upfront, which has lowered the barrier to entry for most homeowners. Those who purchase a system via a loan still maintain eligibility for solar tax credits, including the federal solar tax credit. We’ll briefly list the benefits and drawbacks of securing a solar loan below.

Pros

• Minimal money required upfront
• Lower barrier to entry than a cash purchase
• Allows you to invest your money elsewhere
• Still lets you take advantage of tax credits
• Boosts your home value

Cons

• You’ll pay interest on your loan, which prolongs your solar payback period
• You’ll end up paying more for your system over time

Read Also: Paying For Solar – Tips For Financing (or Refinancing) a Residential System

Leasing Solar Panels: Pros & Cons

Solar leases were once a popular option because they require little to no money down and still let you support the adoption of clean energy sources. However, they’ve increasingly become considered a last-ditch effort to convert to solar for many homeowners because they typically save you the least amount of money. However, with NEM policies changing and solar payback periods getting longer as a result, we do see solar leases making a comeback thanks to the low upfront cost.

Solar leases do tend to be promoted by less reputable companies trying to make a quick buck, so you have to be careful when choosing a provider. The majority of complaints toward solar companies come as a result of low-quality solar leases.

Here’s another key disadvantage of leasing your system: The company you lease from maintains ownership of the panels, which means it cashes in on any available tax credits and rebates rather than you benefitting from them.

Because you don’t own the system, solar leases also won’t add to your home value like solar loans and cash purchases do. In fact, solar leases can complicate the process of selling a home, as not all home buyers will want to assume the lease, and it can cost thousands of dollars to terminate your lease early.

Pros

• No down payment required
• Minimal barrier to entry
• Allows low-income families to support clean energy
• No maintenance required
• More accessible, especially as NEM policies decline

Cons

• Doesn’t increase your home value
• Can complicate the process of selling a home
• You lose eligibility for solar tax incentives
• Sometimes sold by unethical companies
• Often come with hefty cancellation fees

Before we move on, let’s take another look at the biggest advantages and disadvantages of each option.

Which Solar Panel Financing Option Is Right for You?

Ultimately, the way you choose to pay for your solar panel system will depend on a number of factors, including your expendable income, your credit score and ability to get a good loan rate, and more. Here’s a breakdown of which type of solar panel financing may be right for which homeowners:

What’s a Good Interest Rate When Financing Solar Panels?

Solar loan interest rates typically range from around 3.99% to up to 16.99% (with the highest interest rate possible being 24.99%). As is the case with any loan, the lower your interest rate, the better the deal and the less money you’ll pay in interest over time. Lower interest rates help reduce your repayment timeline, ultimately allowing you to save more money in the long run.

The average interest rate for a solar loan is between 3.99% and 5.99%, so we recommend searching for an interest rate below 6%. We’ll discuss some tips for reducing your APR below.

Is Interest From Solar Loans Tax Deductible?

Yes, interest from solar loans is tax deductible, so going solar with solar financing will benefit you when it’s time to do your taxes.

Installing solar equipment — provided you don’t opt for a solar lease — is considered a capital improvement, so it will bump up your home value. Since all capital improvement payments and interest charges are considered tax deductible by the IRS, your solar loan interest will also be tax deductible.

Many states also have sales and property tax exemptions on solar equipment, meaning your property taxes will not increase after solar installation despite it being an improvement. Solar sales tax exemptions can also shave a few thousand dollars off of your installation if you live in a state with sales tax.

Taking advantage of these tax incentives can be a bit confusing, but tax programs — like HR Block and TurboTax — or an accountant can help guide you through the process to ensure the maximum savings on your investment.

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Which Banks Are Best for Solar Loans? (And Where to Apply)

Countless lenders now offer solar loans, so you’ll have plenty of options to choose from. In many cases, your solar installer will have relationships with specific solar loan providers, but you can always choose an outside lender for your solar system. As such, it’s wise to shop around and see which company offers you the lowest solar loan rate and the best terms.

We recommend applying to one or two of the big names that service your area in addition to the companies your solar installer offers. This way, you get a better sense of the options available to you.

We’ll include some information on specific banks for solar loans below, as well as some tips for finding the lowest rate available.

Best Solar Financing Banks

The most popular solar loan providers in most areas throughout the country include Mosaic, LightStream Financial, Sunlight Financial and GoodLeap. These companies have relatively low credit score requirements and can lend between $1,000 and $100,000 for your solar system, depending on your home and eligibility.

You can also turn to the bank or credit union you use for your checking or savings accounts. Many major banks and lenders — including Chase and Bank of America — don’t offer solar-specific loan products, but others — like Wells Fargo and Fannie Mae — do.

You might be eligible for a lower interest rate or more appealing terms if you choose to finance your solar panels with your primary banking institution.

How to Apply to Get the Best Rates

Just like when buying a house, it’s important to get as low an interest rate as possible on your loan. Lower interest rates can make the difference of several thousand dollars in the long run. There are a few things you can do to land more appealing solar loan terms.

• Improve your credit score: Lenders look favorably on borrowers with higher credit scores, and they’re often willing to provide a lower APR to those individuals. It might take some time, but improving your credit score — especially if you’re in the 600-700 range — can do wonders for your solar loan interest rate. To do this, you can pay off credit card debt and ensure you’re not missing any monthly payments.
• Shop around rather than settle for the first rate you get: Different lenders have varying tolerances for risk, which means one lender might offer you a significantly lower rate than another. We recommend getting two or three APR estimates from different top lenders to see which one can serve you best while saving you the most money.
• Choose a secured loan over an unsecured loan: A secured loan, sometimes called a home equity loan or a home equity line of credit (HELOC), utilizes collateral — meaning you’d borrow money against the value of an asset like your home — as a guarantee that you’ll make your monthly payments. Secured loans show you have more “skin in the game,” which lenders see as a sign of commitment and will often lower interest rates for.
• Offer a higher down payment: For the same reasons mentioned above, a higher down payment shows your lender that you’re committed to owning your solar system. Interest rates tend to drop as down payments increase.
• Opt for a fixed interest rate over variable loan options: Loans with fixed interest rates are more predictable and generally a better option than variable rates.
• Have someone co-sign your loan: A co-signer agrees to secure your loan using their own credit score and reputation, so having a co-signer with a high credit score and good credit history is likely to land you a better rate.

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How Long Is a Typical Solar Loan?

Like all other loans, solar loans can vary quite a bit in their length. Most fall between 10 and 20 years, but you could find a lender for a three-year loan or a 30-year loan, depending on your specific situation.

The average length of a solar loan is around 15 years, which is longer than most solar systems take to pay for themselves. Keep in mind that longer loan terms tend to decrease your interest rate, but they also lead to higher overall payments for your system.

What Credit Score Do You Need for a Solar Loan?

Generally speaking, you’ll need a credit score above 550 to secure a solar loan. However, there are exceptions to that rule of thumb, and your loan approval or denial is really based on your individual situation.

We’ll explain what you can reasonably expect as far as an interest rate and overall loan experience based on different credit scores below.

Solar Financing for Credit Score Below 550

If you have a credit score below 550, you’re very likely to have some trouble securing a solar loan. You might be able to find a lender who will make an exception, especially if you provide collateral for the loan — via a secured solar loan — and offer a large down payment.

However, at this credit score, it’s likely a better option to opt for a solar lease or, better still, to work to improve your credit score before applying for a solar loan. These come with the added benefit of no downpayment.

Rates for Credit Scores Between 550 and 650

If your credit score is between 550 and 650, you shouldn’t have too much of an issue finding a mainstream lender to approve a loan for you. Lenders like Upgrade, PenFed, Alliant, BestEgg and LightStream have been known to approve loans in this range.

Keep in mind that if your credit score is in this range, your APR on a solar loan will likely be above the average of 6%, which will cut into your long-term savings.

Financing Solar With a Credit Score of 650+

Once your credit score surpasses 650, you’ll have many options available to you and no shortage of lenders that will approve loans at reasonable annual percentage rates.

In addition to the companies mentioned in the previous credit score range, a 650+ credit score will open you up to loans from SoFi, Mosaic, Discover, SunLight Financial, SunPower Financial and GoodLeap.

Your APR will likely be under 10%, with higher credit scores moving you closer to the 6% average or the lowest rates around 4%.

Watch Below: The below video quickly explains what you should look for in a solar panel loan and how to find the best deal for your needs.

How Can You Save Money When Going Solar?

While the initial solar investment can be steep, there are options available to homeowners who wish to save money on their solar installation.

• Federal solar tax credit: Currently, installing a solar system qualifies you for a tax credit that’s worth 30% of the total equipment and installation cost. That’s an average of $8,991.
• Local utility rebates: Many municipal utility companies offer rebates (such as a property tax exemption) to homeowners who go solar. Research your local utility providers to learn more.
• Net metering: Also see if there is a net metering program available in your area. Net metering gives you the opportunity to funnel any surplus energy you generate back into the electrical grid, in exchange for a credit from your utility company. Note that net metering policies are expected to decline in the near future, as some states, like California, have already rolled out the less appealing net metering 3.0.
• Shopping around: Finally, remember that not all solar installers are created equal. Shop around and compare quotes to ensure you’re getting the best value.

Find out how much you can save by going solar with our Solar Calculator. Find out how much you could save on energy costs and what incentives and tax credits you qualify for.

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Wrap Up: Is Financing Solar Panels Worth it?

As we’ve mentioned, purchasing solar panels with cash upfront will provide the best long-term returns — but we understand that won’t be feasible for most people.

However, for many homeowners, financing solar panels is absolutely worth it. With a solar loan, you get all the same perks of system ownership that you would if you paid in cash but with a minimal down payment — or none at all. Think about it as renting-to-own.

Here are a few of the biggest advantages of financing a system:

• Minimal or zero money down
• Maintains eligibility for the federal tax credit and local rebates
• Boosts your property value

Financing your solar panels will require you to pay more in the long run than you would with cash, as you’ll have the total system cost plus the interest you pay on your loan. However, most homeowners repay their loans within five to 10 years using the energy savings provided by their solar panels.

In closing, solar financing has become an excellent way to convert to renewable energy, minimize your upfront payment and still receive all the tax incentives and energy-saving benefits that come with owning a system.

The cost information presented in this article is derived from a comprehensive analysis, incorporating data from multiple industry sources. The average cost per watt per state was calculated based on figures from Consumer Affairs, Energy Sage, and Berkeley Lab’s Electricity Markets & Policy Department. Additionally, monthly energy consumption and the average monthly cost of electricity were sourced from the U.S. Energy Information Administration, ensuring a well-rounded and accurate representation of the information presented.