What to Know About Solar Panel Financing

On the right home, solar panels can substantially reduce monthly electricity bills, but they cost thousands of dollars upfront. If you don’t have cash to pay for them but want to take advantage of the federal tax credit, financing may be the way to go.

Here’s how to tell if solar panels will save you money and which financing option may work best.

It cost $19,620 to purchase and install a 6kW solar panel system in 2022, according to the Solar Energy Undustries Association ^[0]

2023 solar panel costs by state

The amount a solar system saves you depends on variable factors like utility costs in your area, the cost to buy and install the panels, tax incentives and how much sun exposure your house receives. Here’s what to consider when calculating your savings.

• Will your electric bill decrease? Review your last few utility bills to see what you pay on average. Then, calculate your savings using a solar savings calculator, like Google’s Project Sunroof savings estimator.

• How long will it take to see savings? You won’t yield savings immediately after installing solar panels. The average payback period is five to 15 years, according to SolarReviews, a website that reviews solar companies.

• Are you going to sell your home? A 2019 Zillow study found that homes with solar panels sell for about 4% more than those without. But if this isn’t your long-term home, consider whether the panels would be a turnoff for a potential buyer and whether you’d pay them off before moving.

• Do you expect frequent maintenance? Solar panels require at least annual cleaning to remove debris. Annual cleanings cost from $150 to $630, depending on the system’s size, location on the home and how often the panels are cleaned, according to HomeAdvisor. You may also need an annual inspection, which costs around $150.

Cash is the cheapest way to pay for solar panels and their installation. You’ll also reap savings more quickly because the lower utility bills won’t be offset by loan payments.

Alternatively, you can finance solar panels with a personal loan, home equity financing, a government loan program or through a contractor.

Aim to choose the option that costs the least in total interest but has affordable monthly payments. Consider factors like tax incentives, the repayment term and whether you’ll qualify for a low annual percentage rate when deciding how to finance solar panels.

Personal loan

Personal loans are a type of unsecured financing, meaning neither your home nor the solar panels are collateral for the loan. Loan amounts are from $1,000 to $100,000, and repayment terms are two to seven years.

APRs are 6% to 36%, but your rate is based on personal information like your credit score, income and existing debts. Many lenders let you pre-qualify for a personal loan to preview potential loan offers without undergoing a hard credit check.

» MORE: Compare solar loans

Pros

• Short repayment terms: Your net savings on a solar system will show up sooner if you finance with a personal loan, because these loans have shorter repayment terms than home equity and contractor financing.

• Fast funding: Approval usually takes a day or two, and most personal loans can be funded within a few days after that, meaning you may have funds ready within a week of applying.

• No collateral: When a loan has collateral, like a house or a car, failure to repay can result in the lender taking that collateral. With an unsecured personal loan there’s no risk of losing your home, though your credit score will take a hit if you miss payments.

Cons

• High rates: Personal loans have high rates compared with home equity financing and government loans. The lowest rates go to borrowers with good to excellent credit (690 or higher), high incomes and low debt.

• No tax benefits: These loans don’t have the tax benefits you’d get with a home equity loan or line of credit. There are other tax incentives for adding solar panels (more on those below) but nothing extra for using a personal loan.

• May charge an origination fee: Some lenders charge an origination fee, which is usually 1% to 10% of the loan amount and deducted from the loan proceeds. If your $20,000 loan has a 6% origination fee, for example, you’ll receive $18,800.

» MORE: Best home improvement loans

When a personal solar loan is best

A personal loan may be the best option if you:

• Want the panels installed soon.

• Qualify for a low APR.

• Need to finance the panels, but don’t want to carry debt for a long time.

• Don’t want to use your home as collateral for the loan.

Home equity financing

Home equity loans and lines of credit require your home as collateral for the loan. You must also have enough equity to get the right loan amount. With equity financing, you can borrow up to about 80% of your home’s value, minus what you owe on the mortgage. For example, if your home is worth $300,000 and you owe $200,000, you can borrow up to $40,000.

Home equity loans and HELOCs usually have single-digit APRs, which is lower than most personal loans. The repayment period is usually 15 to 20 years, depending on which you choose.

Pros

• Low rates: A home equity loan is a second fixed-rate mortgage, while a HELOC usually has a variable interest rate. In both cases, the average rates are around 4% to 8%, which is lower than most personal loans.

• Tax benefits: Whenever you use home equity financing for a home improvement project, including solar panel installation, you can deduct the interest on your taxes.

Cons

• Long repayment terms: You could be paying off the solar panels for well over a decade if you use home equity financing, which may offset the savings on your utility bills.

• Your home is collateral: If you’re unable to repay a home equity loan or line of credit, the lender could take your home, and your credit score will drop.

When a home equity loan or line of credit is best

A home equity loan or HELOC may be the best option if you:

• Want a low-rate financing option with tax-deductible interest.

• Don’t mind using your home as collateral.

• Are willing to pay for the solar panels for a decade or longer.

» MORE: How to finance a home improvement project

FHA 203(k) loan

An FHA 203(k) loan allows you to roll the cost of home improvement projects into your new or refinanced mortgage. You can’t use this loan for luxurious additions like a swimming pool, but energy-efficient updates are allowed.

Since a 203(k) loan is a mortgage, you’ll have to pay its rate, which averages 6% to 8%, for the full mortgage term, unless you refinance. Typical mortgage terms are 15 or 30 years.

Pros

• Soft borrowing requirements: FHA loans allow credit scores as low as 500, which is lower than many other mortgage lenders. However, a lower credit score may require a larger down payment.

• Low interest rates: Interest rates are lower on FHA 203(k) than on personal loans.

Cons

• FHA mortgage insurance: These loans require FHA mortgage insurance, regardless of the down payment amount.

• You must find a contractor who can start within 30 days: The FHA pays the contractor for their work from an escrow account and requires work to start within 30 days of the first payment (usually the closing date) and finish within six months.

When a 203(k) loan is best

A 203(k) loan may be the best option if you:

• Can’t qualify for a home equity loan or line of credit.

• Will get a similar or lower interest rate than your current mortgage, if you’re refinancing.

• Can coordinate with the contractor to start and complete the project on time.

Contractor financing

The contractor that installs your system may offer to help you finance it using a third-party lender. You can usually borrow the amount the contractor quotes, and interest rates are often in the single digits. Terms are from 10 to 25 years.

Different installation companies may offer varying loan amounts, rates and repayment terms.

Pros

• Convenience: Using the same company to finance and install the solar panels may be convenient because you may be able to apply, get approved and start work in the same day or week, depending on which lender your contractor uses.

• Low rates: A solar company may offer lower rates than a home equity loan or line of credit.

Cons

• Long repayment terms: Interest will add up — even if it’s a low rate — if the term is 20 or 25 years. A 20-year, $20,000 loan with a 1.99% APR would cost $4,260 in total interest. Plus, the monthly payment will offset your savings for two decades.

• May charge an origination fee: Some lenders charge an origination fee, which you may not have to pay with home equity and government financing.

• May not offer pre-qualification: The contractor may not offer pre-qualification, which means you’ll undergo a hard credit check to see if you’re approved and what loan offer you qualify for.

When solar company financing is best

Financing through the solar panel installation company may be the best option if you:

• Want the financing and installation through the same company.

• Would pay less than with a personal loan or home equity option.

» MORE: Should you finance solar panels through your contractor?

If you want the benefits of solar panels without buying them, consider leasing or renting. In both cases, you can reduce your energy bill without a lump-sum payment to own them. However, you’ll save less money and you won’t get any tax benefits.

A solar lease is where a solar installation or financing company owns the solar panels and you pay a fixed monthly rate to use them. Leases are usually from 20 to 25 years, according to the U.S. Department of Energy ^[0]

You may not save as much with a lease because the monthly payment could counteract energy bill savings. If you sell the house before the lease ends, you may have to convince a buyer to take on the lease or pay to have the panels transferred to your new home.

A power purchase agreement, or PPA, is similar to a lease, but instead of paying to rent solar panels, you pay for the energy they generate, ideally at a lower price than the standard rate. A developer installs and maintains the panels. Your rate may increase 2% to 5% each year with a PPA, according to SEIA ^[0]

The federal government offers a tax credit that allows homeowners to deduct a portion of the system’s cost from their income taxes. For solar panels installed in 2020 or 2021, the tax credit is 26%; for systems installed in 2022 through 2032, it’s 30%, according to the Energy Department ^[0]

Here’s what you need to be eligible for a credit, according to the Energy Department.

• The system must be installed between Jan. 1, 2017, and Dec. 31, 2034.

• The system must be on your primary or secondary residence.

• You must have bought the solar panels. You’re still eligible if you financed the system, but residents with solar leases or power purchase agreements aren’t eligible.

• The system must be new.

» MORE: Tax credits and perks for eco-friendly home improvements in 2023

Local solar rebates

Your state, county or city may also offer a benefit for installing solar panels. For example, the utility company in Austin, Texas, offers a $2,500 rebate for homeowners who go solar and take a solar education course.

Search the Database of State Incentives for Renewables & Efficiency to see what’s available in your area, or contact your utility company.

Money from the state or a local government will be subtracted before the federal tax incentive is applied. Say you buy a $20,000 system in 2023 and get $2,500 back from your public utility. You’d subtract the $2,500 from the $20,000 and apply the 30% tax credit to the remaining $17,500.