Solar Loans: Compare Solar Panel Financing Options

What is a solar loan?

A solar loan is an unsecured personal loan that’s used to pay for solar panels and their installation. Banks, credit unions and online lenders provide solar loans. Typical loan amounts are $1,000 to $100,000, and annual percentage rates are 6% to 36%.

How do solar loans work?

Solar loans are installment loans. You receive money in a lump sum and repay it in equal monthly installments over a predetermined period, typically two to seven years.

Unlike with home equity financing, there’s no collateral on solar loans. This means your property isn’t at risk if you miss payments, but it also means interest rates can be high.

How to compare solar loans

Compare these features to find a low-cost loan that fits your budget:

• Annual percentage rate: APR represents the total cost of a loan, including interest and any fees. The loan with the lowest APR is the least expensive.

• Monthly payment: Affordable monthly payments are as important as getting a low rate. Be sure loan payments fit comfortably into your budget because missed or late payments can negatively affect your credit.

• Fees: Some lenders charge an origination fee that’s typically 1% to 10% of the loan amount. The lender may take the fee before sending you the funds, thereby lowering the amount you receive.

• Term: The loan’s repayment term helps determine the monthly payments. Loans with longer repayment terms have lower payments but cost more in total interest.

» MORE: Compare the best home improvement loans

How to get a solar loan

1. Get a cost estimate. Compare bids from multiple solar panel installation companies. This will tell you how much you need to borrow.

2. Calculate solar loan payments. Use a solar loan calculator to determine what APR and repayment term will get you an affordable monthly payment.

3. Check your rate. Many lenders offer pre-qualification, which lets applicants preview their potential loan rate, amount, monthly payment and repayment term. This requires only a soft credit pull, so you can review multiple offers before applying.

4. Apply. Once you accept a loan offer, the lender may require documents to verify your employment, income, address and other information. Have your W-2s and tax documents ready to make the application process go smoothly.

5. Get funded. If approved, expect to receive funds within a week.

Solar panel tax benefits

The federal government provides a 30% tax credit for those who purchase and install a solar panel system between 2022 and 2032. The credit will decrease to 26% in 2033 and 22% in 2034.

If you install solar panels in 2023, you could receive a $6,000 credit on a $20,000 system with the federal tax credit alone.

You can take advantage of tax benefits if you own your system, no matter how you pay for it.

Tax credits reduce your tax liability. If you get a $6,000 credit, you can reduce your tax bill by $6,000. This credit is nonrefundable, meaning if you don’t owe taxes — or owe less money than the 30% credit amounts to — you won’t get that money back in a refund. You can, however, carry any unused credit amount to a future tax year.

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

Solar company financing

Some solar companies offer financing through third-party lenders. These loans can be similar to home improvement loans — unsecured with no down payment required. The payment plans could have lower rates and longer repayment terms than personal loans, making your monthly payment lower.

Compare a quote from a solar company with other options to find the least expensive one.

» MORE: How to finance solar panels

Home equity loan

If you know how much your solar panels will cost, you can apply for a fixed-rate home equity loan. These loans have lower rates and longer repayment terms than unsecured loans because putting up your home as collateral lowers the risk for a lender.

» MORE: Best home equity 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, and you often have the option to pay only interest during the initial portion of the loan. Unlike personal and home equity loans, HELOCs have variable rates.

» MORE: Best home equity lines of credit

Cash-out refinance

A cash-out refinance is a second mortgage that’s larger than your current mortgage. You use the new loan to pay the old loan and “cash out” the difference to purchase solar panels. 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 can be 2% to 6% of the mortgage’s cost. That means a $350,000 mortgage can cost $21,000 in closing costs — which is more expensive than some solar panel systems.

» MORE: Best cash-out refinance lenders

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.

Are solar panels a good investment?

Here’s how to determine whether solar panels are worth the investment:

Calculate your sun exposure, costs and savings. Solar panels will help people in some parts of the country save more money than 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. In 2021, the average household used 886 kilowatt-hours each month, according to the latest data from the U.S. Energy Information Administration. In November 2022, homeowners paid an average of nearly 15.64 cents per kilowatt-hour.

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

» MORE: Are solar panels worth it?

Estimate your payback period. Your solar loan payback period is the length of time it takes for your electric bill savings to match the cost of installing the system. This will be years, not months.

Let’s say you pay $14,000 for new solar panels and they save you $1,500 per year on your utility bills. Your payback period would be a little over nine years.