Solar Loans: How to Finance Your Solar Panel System

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What to look for in an unsecured solar loan

Unsecured loans with low rates and short repayment terms can help you pay off your solar panel system quickly. In contrast, you may be making smaller payments on a home equity line of credit for 10 to 20 years.

Annual percentage rate: The APR is the total cost of your loan, including interest and fees. Rates on personal loans range from about 6% to 36%, with the lowest rates reserved for good- and excellent-credit borrowers with little debt. When comparing loans, be sure to compare APRs, rather than just interest rates, to make a sound comparison.

» MORE: Calculate your unsecured solar loan payments

Fees: Some lenders charge an origination fee, which can be 1% to 6% of the cost of the loan, and is usually taken off the amount you’re given. If you get a $10,000 loan with a 3% origination fee, the lender will keep $300 of the loan.

Terms: The amount of time you have to repay your loan helps to determine your monthly payments. With longer repayment terms, you have lower payments but you’ll pay more total interest.

Pre-qualify for a solar loan

Take the steps to pre-qualify for a personal loan on NerdWallet to see what rates and terms are available to you. This process typically involves a soft credit check, which doesn't impact your credit score.

» GET STARTED: Pre-qualify with multiple online lenders on NerdWallet

Solar panel tax benefits

For people who purchase and install a solar panel system, the federal government provides a 26% tax credit for solar panel installation in 2020. That credit will lower to 22% in 2021 and there isn’t a tax credit for residential solar systems scheduled after that.

For example, you could receive a $5,200 credit on a $20,000 system with the federal tax credit alone.

You can take advantage of tax benefits as long as you own your system, no matter how you fund it.

The federal tax credit is nonrefundable, meaning if you don’t owe taxes the year you get your panels installed — or owe less than the 26% credit will get you — you won’t get those savings.

Some states also offer tax benefits and other incentives for solar installation. You can look up your state’s offerings in the Database of State Incentives for Renewables and Efficiency.

Other types of solar loans

Home equity loan

If you already know how much your solar panels will cost, you can apply for a home equity loan. Since borrowers take on more risk by putting the home up as collateral with a home equity loan, it has lower rates and longer repayment terms than unsecured loans.

Home equity line of credit

A HELOC is another low-rate option that is secured by your home. It’s more flexible than a home equity loan because you can draw on funds as you need them for the project, and you often have the option to only pay interest during the initial portion of the loan.

» MORE: Best home equity lines of credit

If you’re considering a home-equity option, learn the pros and cons of each before you choose.

Cash-out refinance

A cash-out refinance can get you a new mortgage at a lower rate that includes the cost of solar panels and installation. It’s a good option if current mortgage rates are lower than what you’re paying and if you can keep closing costs low.

Closing costs on a cash-out refinance can be 2% to 5% of the mortgage’s cost. That means, on the high end, a $250,000 mortgage can come with $12,500 in closing costs — which is almost the same cost as some solar panels.

Leasing or getting a power purchase agreement

If you don’t want to make a large upfront payment or are ineligible for federal and state tax credits, consider a power purchase agreement or leasing solar panels.

In both cases, you pay little or no upfront costs to essentially rent the solar panels. The owner of the panels collects rent from you and receives any available tax incentives from the government. You’re also not responsible for maintenance.

The U.S. Department of Energy has more details about the difference between a lease and power purchase agreement.

Things to consider with solar panels

Calculate your sun exposure, costs and savings. In some parts of the country, solar panels will save more money and add more value to your home than in others. For example, someone in Seattle might not get the same value from solar panels as someone in Phoenix because of the disparity in sunshine.

To estimate your savings, you first need to know how many kilowatt-hours you use and how much you’re paying for them. The average household pays about 13 cents per kilowatt-hour for 914 kilowatt-hours each month, according to 2019 data from the U.S. Energy Information Administration.

Then, figure out what size system you’ll need. You can use the Solar-Estimate calculator to see how many panels your home would need and how much energy they would generate.

» MORE: Will solar panels save you money?

Expect to make your money back over years, not months. The Center for Sustainable Energy estimates it takes six to nine years to recoup the cost of adding solar panels to your home. So your utility bill savings won’t immediately put more money in your pocket.

How long it’ll take you to make the cost of the panels back depends on the system you choose, which government funding programs are available, where you live and how you decide to pay for it.