As solar energy becomes more popular in the United States, the eagerness of homeowners and businesses to harness this renewable energy source is ever-increasing. One of the effective ways to finance solar energy systems is to take out solar loans, allowing individuals and organizations to install solar panels and make payments over time. These types of loans provide multiple advantages, including low-interest rates, flexible repayment options, and substantial long-term savings on energy bills.
In this guide, we will explore solar loans in the United States: how they work, the different types, and everything you should consider before financing your solar panel system.
- What is a Solar Loan?
A solar loan is a financing mechanism for homeowners or businesses, allowing them to secure financing against the upfront costs of installing a solar energy system. If the solar energy system is leased or if a PPA is employed, ownership will remain with someone else; the beneficiary—homeowner or business—will have to make an income through the system through energy savings and possible tax credits.
Most of the time, these loans provide you with a lump sum advanced to finance the installation of the solar panels. After that, you will be repaying the amount over some period, generally 5 to 20 years, though this can vary from one lender to another. Some solar loans are secured, while others can be unsecured, depending on the stances of the lenders.
Several Types of Solar Loans
a). Secured Solar Loans
A secured solar loan is one that is secured by the home or another asset. Since the loan is susceptible to collateral, the interest rates are low compared to other unsecured loans. But if you do not repay as agreed, the lender may lay claim to the collateral.
Pros: Lower interest rates and extended repayment period
Cons: Risk of collateral loss if loan is not repaid
b. Unsecured Solar Loans
An unsecured solar loan is one that is not collateralized by any other property. Secured loans are less risky for the homeowner, but interest rates end up being much higher. Unsecured loans are an excellent option for people who prefer not to risk their home on a loan.
Pros: No collateral needed and fast approval
Cons: Higher interest rates; the payment duration is shorter
c. Home Equity Loans
A home equity loan (also known as HELOC), a kind of solar loan, allows homeowners to borrow against some of their home equity. This kind of loan is also typically lower in interest because the loan is secured by the home; however, you do stand to lose the property if you default.
Pros: Lower interest rates, larger loan amounts
Cons: Potential foreclosure risk should you default
d. Property Assessed Clean Energy (PACE) Loans
PACE loans are a special financing option in some states, which allow homeowners to finance the cost of solar panels via property tax bills. The loan is reimbursed as part of the property tax payment, which in some cases means it’s less burdensome for homeowners.
Pros: Payments tie to property taxes, may not require any upfront costs
e. Personal Loans for Solar Installation
A personal loan is a more traditional loan that can be used for a variety of purposes, including solar panel installation. These loans are typically unsecured and offer fixed interest rates and repayment terms.
- Pros: Quick approval process, no collateral required
- Cons: Higher interest rates compared to secured loans
How Solar Loans Work
Solar loans function similarly to other types of loans, but with a focus on financing renewable energy projects. Here’s how they generally work:
Step 1: Apply for a Loan
Once you’ve decided to go solar, you’ll need to apply for a solar loan. This process may involve submitting personal and financial information, including credit scores, income details, and home value.
Step 2: Approval and Loan Terms
If you qualify for the loan, the lender will offer terms, including the loan amount, interest rate, repayment period, and other conditions. Depending on the type of loan, your interest rate could vary, but it will generally be lower than credit card or personal loan rates.
Step 3: Installation of Solar Panels
Once the loan is approved, the lender will release the funds to your chosen solar installer. The installer will then complete the installation of the solar panels on your home or business. The loan repayment begins either immediately or after a grace period.
Step 4: Repayment
After installation, you’ll start repaying the loan according to the agreed-upon terms. Payments are typically monthly and can range from 5 to 20 years. Throughout the repayment period, you will continue to save on your electricity bills, which can offset the cost of the loan.
4. Benefits of Solar Loans
a. Immediate Savings on Energy Bills
While you are repaying your loan, the solar panels you’ve installed will likely reduce your monthly electricity bills. In some cases, your solar panels may even cover your entire electricity consumption, making your loan payments an offset to your energy costs.
b. Tax Incentives and Rebates
As a solar panel owner, you are eligible for federal and sometimes state-level incentives, such as the Investment Tax Credit (ITC), which provides a 30% federal tax credit on the total cost of your solar installation. This can significantly reduce the upfront cost of your solar panels, even though you are financing them through a loan.
c. Increase in Home Value
Studies have shown that homes with solar panel systems tend to have higher property values. Installing solar panels through a solar loan could increase the resale value of your property, providing an added benefit if you plan to sell in the future.
d. Flexibility
Solar loans offer flexibility in terms of loan duration, repayment options, and interest rates. Whether you’re interested in a short-term loan with higher payments or a longer-term loan with lower monthly installments, there are options that can suit your financial situation.
e. Fixed Monthly Payments
With most solar loans, the monthly payment amount is fixed, meaning you’ll know exactly how much you owe each month. This can make budgeting easier and provide peace of mind knowing your payments won’t fluctuate.