How the Fed’s interest rate cut benefits solar shoppers

The Federal Reserve cut interest rates on Wednesday for the first time in more than four years, dropping the federal funds rate 50 basis points, which brings the benchmark lending rate down to 4.75 - 5.25%. This is good news for homeowners looking to go solar.

The solar industry experienced a slow down over the past couple years as higher interest rates made homeowners and business owners alike hesitant to purchase pricey solar systems that often need to be financed with loans. Increased rates made those loans more expensive and changed the financial equation for many people wanting to invest in renewable energy by pushing out the solar break-even point by several years. 

But the Fed’s highly anticipated September rate cut – combined with dropping installation costs – should make the financials involved with going solar more appealing to on-the-fence homeowners, and start driving up demand. Now that rates have dropped – and are likely to be cut again before the end of the year – homeowners will see a return on their solar investment faster than they would have even a year ago. For example, the 50- basis- point reduction in the Fed funds rate means that a $30,000 home solar panel system would cost about  $3,000 less over the course of a 20-year loan due to reduced interest payments.

Even though going solar is a wise investment regardless of the interest rate environment, when rates drop like they did on Wednesday – the numbers work even more so in homeowners favor, providing them with a faster solar payback period and less money spent on interest overall. 

"It may not sound like much, but this rate cut will save solar shoppers thousands of dollars in interest over the lifetime of their solar panels," said Spencer Fields, director of insights at EnergySage. "Most solar adopters finance their system with a loan, so dropping interest rates will help make solar more affordable and likely drive up demand for new commercial and residential solar installations."

How much you can save with solar will always depend on a few key factors including the cost of electricity in your area, how much electricity you use and your state’s energy policies such as net metering. But your interest rate will always be a critical factor in your savings equation if you take out a loan to pay for your solar panels.

Just as with a mortgage or any other major purchase you choose to finance, the lower your interest rate, the less interest you’ll have to pay over time, and the more money you’ll save. The average home solar panel system costs about $30,000, and according to EnergySage data, around 85% of homeowners finance their solar system. 

Let’s look at a quick example: If you take out a $30,000 loan at a 4.75% interest rate for a 20-year term, you’ll pay about $16,500 in interest. That same loan at a 5.50% rate, will cost you around $19,500 in interest. That means the interest rate cut could save you as much as $3,000 in interest payments over your loan term. 

Plus, most EnergySage customers often pay off their solar loans early, further reducing their overall interest payments. An EnergySage analysis found that the typical homeowner who used EnergySage for their solar project paid off their solar loans in less than 10 years. So this interest rate cut, combined with the early repayment schedule,  could add up to as much as $10,000 in saved interest costs for a 20-year loan.

When it comes to solar loans, it’s also important to remember that there can be additional fees and costs rolled into your loan depending on your lender and the specific terms of your loan. That’s why it’s vital to look at not just the interest rate, but the Annual Percentage Rate, or APR, because the APR includes all of the other fees built into your loan, giving you a more complete picture of the rate you’re truly paying.

A lower interest rate speeds up your solar payback period

Solar is a worthwhile investment because, as we explained above, you can often make your money back in less than 10 years, which means from there on it’s pure savings going back into your pocket. Even if they take out a 20-year loan, the average homeowner who goes solar through the EnergySage Marketplace pays their loan back in less than 10 years. So if you take out a loan while interest rates are lower like they are now, you’ll hit your payback period sooner and save yourself more money over time.

Should I wait to buy solar panels until interest rates drop again? 

You’ve probably heard the conventional wisdom that it’s not smart to try and time the stock market. Well, the same advice applies to timing interest rate cuts. Fed officials indicated they intend to cut rates another 50 basis points before the end of the year, with additional possible cuts coming in 2025. However, all kinds of macroeconomic factors impact the Fed’s final decision, and until they announce their decision, it’s never set in stone. Depending on the inflation rate and the strength of the job market, for example, the Fed may change course and deviate from an expected rate cut.