How Does a Solar Loan Work?

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How Does A Solar Loan Work

Many Oregon families want to go solar but don’t have the cash on hand for this investment. For this reason, solar loans are a very popular way to finance a solar panel installation. In many cases, these loans are relatively easy to obtain and require no downpayment. Depending on the terms, many solar energy systems are cash flow positive from day one, making them a wise investment. Let’s explore how solar loans work so you can decide if one is right for your household.

Paying a bill

What is a solar loan?

This solar financing option allows homeowners to install solar panels with no money upfront. Unlike with a power purchase agreement (PPA) or lease, the homeowner owns the solar system. Some financial institutions have loans that are specifically designed for installing solar energy systems.

Depending on the loan, the difference between the electric bill savings and the loan payments often makes this arrangement cash-flow neutral or even positive. This happens when the electricity bill savings are equal or greater than the loan payments. At the end of the loan period, you will own your solar panels and enjoy many years of free, solar electricity. As electricity rates increase over time, your solar energy savings will also increase.

At Smart Solar Energy, we partner with local credit unions, and they typically require a minimum credit score of 660. Our customers usually enjoy a 12-year loan with a 2.99% interest rate. If desired, we can help arrange a loan with a longer-term for lower monthly payments. These loans have a fixed interest rate and no prepayment penalty. One big bonus is that the interest on these loans is tax-deductible!

These loans have the same monthly payments throughout the term of the loan. The amount you can borrow is usually limited to 85% of your property value.

Investing

Is a solar loan a wise investment?

Going solar is an excellent way to virtually eliminate your power bill. Unlike adding a patio or completing a bathroom remodel, installing a solar system actually pays for itself in the savings. If you can get a low-interest loan with a 12-year term, it is a wise investment!

Many financial experts recommend avoiding debt unless it increases your net worth, provides long-term value, or helps generate income. Solar boosts home values and virtually eliminates your power bill for decades. Under net metering, the electric utility will credit you for surplus solar electricity you feed to the power grid, and many of our customers pay only the monthly connection fee.

Because the design life of the solar system is 25 or more years, you will enjoy 13+ years of free electricity after you have paid off your loan. As electricity rates increase, the value of the solar energy savings also increases.

Investing in a solar energy system is wise because it is a low-risk investment. You know the sun will shine and that your home will need electricity. You can bet on electricity rates increasing over time. With no moving parts, solar energy systems are very reliable and virtually maintenance-free.

House In The Sun

For solar energy to be a wise investment, it is crucial to choose a top-notch solar installer that uses high-quality solar panels, inverters, batteries, and components. Also, the warranties that solar companies provide vary widely. The longer the warranty, the safer the investment.

Smart Solar Energy also provides an industry-leading 25-year labor and service warranty on all the systems we install! This offers peace of mind that your solar system will be producing clean energy for decades. Our solar installers are among the best in the industry and include NABCEP-certified solar experts and licensed electricians. To learn more about going solar, contact Smart Solar Energy today!

Are there other solar financing options?

The three main ways to install solar panels on your home with no money down include solar leases, power purchase agreements (PPAs), or solar loans. At Smart Solar Energy, we strongly recommend our residential customers own a solar system to get the most benefit from the solar panels. Thus, of the three options, solar loans are generally the best for residential customers.

With a solar system lease, the homeowner gets solar panels for no money down, but they are actually leasing the equipment on their roof instead of owning it. Unfortunately, solar system leases have many drawbacks.

Disadvantages of solar leases and PPAs

Solar leases can complicate things if you decide to sell your home during the lease period, which is typically 20 to 25 years. If you cannot find a home buyer willing and able to take over the solar lease and meets the criteria, you may need to buy yourself out of the lease agreement. Also, the homeowner doesn’t get to take advantage of the solar tax credit because they don’t own the solar PV panels.

Home For Sale

Disadvantages of solar loans

In general, homeowners are responsible for the maintenance of a solar system if they own it. The solar company is responsible for maintenance for PPAs or leases. Typically, one of the advantages of PPAs and solar leases is not being responsible for the maintenance and associated expenses, but this isn’t the case when using Smart Solar Energy.

We offer a 25-year labor and service warranty on all the solar systems we install. This means that we will fix it if there is premature equipment failure, free of charge. To learn more about how our comprehensive warranty protects your investment, contact us today.

Advantages of solar loans

There is a solar tax credit available for 26% of the total system cost of the solar PV system. A tax credit is a dollar-for-dollar reduction in income taxes owed to the federal government. Thus, it is more valuable to the taxpayer than a tax write-off.

If you purchase a $15,000 solar system, it could qualify for a $3,900 tax credit. Thus, the net solar system cost would be $11,100. Speak with a tax expert to determine if you are eligible for this valuable incentive.

What are the key characteristics of my solar financing options?

There are some valuable concepts to understand better how solar loans work and select the best available options. We recommend really understanding the terms of a loan before committing to it so you can make an informed decision. We are happy to discuss your various options and help you make the best solar financing decision.

Home with solar panels

Secured vs. unsecured

There are two types of solar loans, secured or unsecured. A secured loan uses your home as collateral and is often referred to as a home equity line of credit or a second mortgage. If someone were to default on such a loan, the bank could potentially foreclose on the home.

For this reason, secured solar loans often have a lower interest rate because they are less risky to the lender. This solar financing option can take a bit more time because the bank may need to assess the value of your home, which might involve an appraisal. Most of our customers get a rate of just 2.99% for 12 years with these loans!

One major advantage of a home equity line of credit is that the loan interest is tax-deductible. According to the IRS, you can deduct the interest on the loan if you “buy, build or substantially renovate your home.” Because a solar system is a major home upgrade, it allows homeowners to deduct the mortgage interest on their federal taxes.

Another option is an unsecured loan, which is often called a personal loan. These loans do not use an asset as collateral and work similarly to a credit card. Unfortunately, these loans usually have high interest rates of 5.99% or higher, and the interest is not tax-deductible. Therefore, these loans are much less desirable and more costly because they diminish the financial returns of installing a solar system.

Interest rate

The higher the interest rate, the more you will pay for your loan over time. This is one of the big reasons why we generally do not recommend personal loans to purchase a solar system. Unfortunately, the solar financing interest degrades the return from the solar energy system. By contrast, our credit union partners often provide a solar loan with a low interest rate of 2.99%. In many cases, this is a lower or similar rate to the mortgage.

Payment

Downpayment requirements

At Smart Solar Energy, we make the process of going solar simple and easy. Therefore, we use loan partners that do not require a downpayment to install solar panels. This means you can install solar panels for no money down and affordable monthly payments.

Solar loan length

Like the interest rate, the length of the loan also impacts your monthly payments. If all other factors are equal, shorter loan periods have higher monthly payments because you pay for your solar panel installation more quickly. Thus, longer loan terms have lower monthly payments.

At Smart Solar Energy, we recommend a solar loan with a 12-year term because your loan payments are often equal or possibly less than your utility bill savings.

Prepayment penalties

Some loans actually penalize people for paying back the loan ahead of schedule. Whenever possible, we recommend loans without prepayment penalties because they limit your options. For example, many of our customers use the savings from the tax credit to pay down the loan more quickly. Banks would penalize these customers for making extra payments. When we work with our financial partners to secure solar loans, we look for loans without prepayment penalties for our customers.

Is a solar loan or a personal loan better?

Whenever possible, we recommend getting a solar loan instead of a personal loan for two main reasons. The interest rate on solar loans is usually half or even less than a personal loan, making them far more attractive. Also, the interest on home equity loans is tax-deductible if you use the funds to improve your property.

Occasionally, there are exceptions to this recommendation. For example, if you only need the loan for a very short period and then pay it off quickly, a personal loan might be better.

Does a solar loan impact my tax credit?

No, it doesn’t. Homeowners that use a loan to purchase a solar panel system are still eligible for the tax credit. This is because they own the solar system despite there being a loan. Conversely, homeowners that lease a solar system or enter a power purchase agreement are not eligible for the tax credit because they do not own the solar panels. Given the value of the solar tax credit, this is a huge advantage to a solar loan!

Who should get a solar loan?

At Smart Solar Energy, we recommend solar loans in several situations.

  • If you want to install solar panels but either don’t have the money or want to invest it in other things, a solar loan is an excellent opportunity.
  • There are great tax breaks for using home equity loans to buy a solar energy system, which are most valuable to people with a tax appetite.
  • If you use a reputable solar installer with long warranties, that will help protect your investment.

The best time to install a solar energy system is right away, so you can start enjoying the electric bill savings. At Smart Solar Energy, we are happy to speak with customers about solar loan options and answer any questions. To learn more about installing solar panels on your house, request a free solar audit.

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