Solar Loans: What They Are and How to Get One

Installing solar panels can be a game changer -- you can even ditch the electric grid and entirely power your home with a properly-sized solar panel system.

The downside is that solar panels aren't cheap. The average cost of an 8-kilowatt residential panel system is $3 per watt. You might be looking at a ~$24,000 bill before tax credits and other incentives kick in, depending on your home, appliance usage and energy consumption needs.

One way to pay for your home solar panel system is to get it financed. Many solar companies will even offer loans or other financing options as part of the installation process. Here's what you need to know and how to get the best deal on a solar loan.

What is a solar loan? 

The solar company you choose might offer you a loan to pay for the system. Some of these companies are one-stop shops that will handle the installation and also provide financing. The lender partnering with the solar company might be a bank, a solar company, credit union, green bank, public-private partnership or utility. 

A solar loan works similarly to other installment loans, such as personal loans. You agree to pay back the loan over time, with interest. The loans vary by solar company, and may feature different monthly payments, interest rates and loan terms. They might have different credit and financial requirements. 

Financing through an installer might give you the option of bundling other ways to boost your home, such as with energy-efficient upgrades or roof replacements. 

One perk of getting a loan with a solar installer is that it's convenient. You apply through the installer, and make the loan payments through them. "It's one less point of contact that you need to deal with because they basically do solar loans all day versus if you were trying to get a different loan from a bank on your own and needing to do the solar," said Krystal Persaud, co-founder of Wildgrid, an online platform that helps homeowners save money with home upgrades. "It's a fairly straightforward application process."

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A significant downside? Dealer fees. These could add thousands of dollars to the price tag of the loan, which compounds on the prices you're paying and makes things much more expensive in the long-term.

A few states also offer what's known as on-bill financing, according to a guide by the Clean Energy States Alliance. Participating utility companies lump together your monthly electric bill with your solar loan so you only need to make a single payment.

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How to get a loan for solar panels? 

Here are the main ways to get a loan for a solar panel:

Personal loans: A personal loan means your solar system is paid in full by the lender, and you have to pay the lender back over time. You're responsible for making monthly payments in installments.

Personal loans come with different terms, interest rates and fees. They can be secured or unsecured. A secured personal loan means it's backed by a form of collateral, such as your house, car or even the solar panels themselves. 

Installer financing: This is a loan you get through the solar company that installs your home solar system. It's similar to a personal loan in that you agree to pay off the loan over a number of years. The loan amount, terms, fees and interest rates vary by the installer.

Installer financing might allow you to also tack on financing for energy-efficient upgrades to your home. One caveat: Some installer financing options mean you only pay the interest for the first year of the loan. That way, you can reap tax incentives, deductions and rebates. While that equates to lower payments the first year, it also means higher payments for the remainder of the loan. 

Home equity loans: A home equity loan is when you borrow money using your home's equity as collateral. Equity is the difference between what you still owe on your mortgage and the current value of the home.

Home equity loans can be less expensive than, say, credit cards or personal loans, and the interest rates are generally fixed. But if you fall behind on payments, you risk losing your home.

Home equity line of credit (HELOC): Like a home equity loan, you access the equity in your home to get financing. And you also risk losing your home if you have trouble keeping up with payments. A major difference is that a HELOC works in the same fashion as a credit card. You have a line of credit you can tap into as needed, for a certain period, and pay it back over time. HELOCs typically have variable interest rates.

Jump-start your solar journey by exploring Home Equity and HELOC rates from multiple lenders

Green banks: A green bank is a network of banks that exclusively focuses on providing financing for green and energy-efficient upgrades for businesses and residents. Green banks often have a network of installers, electricians and installation providers. "Providers in their network are pre-approved and qualified to be a lending partner for those installers," Persaud said. "They also have initiatives to provide assistance to low-to-middle income families. So if your income level is considered low income, you could get different rates, availability and financing plans versus if you are higher income." 

What are the types of solar energy loans? 

Solar energy loans fall within two main categories: secured or unsecured. With a secured loan, such as a home equity loan, HELOC or secured personal loan, you use a valuable asset (such as your home) as collateral. Should you become unable to keep up with your loan payments, the lender secures their investment and gets their money back by seizing that asset.

Some advantages of secured solar loans is that the lending criteria, such as your income, credit score, and debt-to-income ratio can be less stringent than with an unsecured loan, so it might be easier for you to qualify for one. The interest rates can be lower and loan amounts can be higher for secured solar loans, too. The major disadvantage is the risk of losing your home if you don't pay the loan back in time.

Unsecured loans, on the other hand, don't require collateral. The major advantage of this option is not needing to risk a valuable asset. Downsides include more stringent lending criteria, such as a higher credit score and lower debt-to-income ratio, in order to qualify. Plus, interest rates tend to be higher, and you'll generally be loaned less money in an unsecured loan agreement. 

Cash vs. solar financing

If you're considering paying in cash, a major benefit is that you reap the savings -- after you pass your solar payback period. Plus, you save on interest fees. However, that's less money you have in your bank account for emergencies, or to put toward other large-ticket purchases or financial goals.

If you're going with a solar loan, you spread out those payments over the term of the loan, which can range from anywhere from two to 25 years. A downside? You're paying interest, and you're on the hook for payments that can stretch out for decades to come.

Let's take a closer look at the pros and cons of both: 

Pros of paying with cash for solar panels

• Don't need to worry about making payments. 
• Save on interest and other fees. 

Cons of paying with cash for solar panels

• Less money in your bank account for other financial goals, savings and large purchases. 
• Need to be able to afford to pay in cash. 

Pros of solar financing 

• Can make solar panels more affordable. 
• Frees up cash you have for other financial goals and priorities. 

Cons of solar financing 

• Pay interest and fees.
• Responsible for ongoing payments.
• Researching financing options and applying takes time and energy. 
• If the loan is secured, you could risk losing your home. 

Alternative ways to go solar

Not able to purchase a solar panel system because of the cost, or maybe because you're a renter? Here are some options to go solar regardless: 

Community solar programs 

Also known as a community solar farm, a community solar program is a solar array that is connected to the grid that homeowners can pay a subscription fee to get electricity from. There are currently about 1,600 community solar projects across the US.

Paying for community solar can provide a discount on your power bill, and you can also support clean energy in your area. While you save on your energy bill by subscribing to community solar programs, you won't be able to save as much as you would with your own rooftop solar installation. 

Leasing 

Just as you would lease a car, with a solar lease you agree to make monthly payments to the solar company. The company is responsible for installing and operating the system at your home -- they own the system. 

A pro of leasing is that you usually don't have to worry about doing any maintenance. Under certain agreements, you might even get credit for any excess electricity generated. A downside is that you don't own the system, and won't benefit from the associated tax credits or incentives. 

Power purchase agreements 

With a home solar power purchase agreement, similar to a lease, you work with a solar company that installs and operates the system. The main difference is that with a lease, you pay the same amount each month. With a PPA, you pay a rate per kilowatt-hour of energy that's based on your usage. You don't have to worry about maintenance, and you only pay what you use. A downside is that you don't get to keep the system for your home. 

The bottom line

No matter which financing option you go for, figuring out the potential cost savings is a major factor. 

"It's a really good idea to really look at your monthly electric bill," Persaud said. "Let's say your utility bill is $200 a month. It would be great if you could negotiate a solar loan payment that was $200 a month or less, because then you're immediately paying less, because when you go solar, the goal is to get enough solar panels to cover all of your electricity use so that your electricity bill goes down to as close to zero as possible. Unfortunately, the utility companies own, like, the wires, and you'll always have to pay delivery charges."