Solar loans: Everything you need to know (2024)

If you’re interested in going solar, but feel like you can’t afford the upfront costs, consider taking out a solar loan. The availability of solar loans – most of which require no down payment – has greatly increased over the past few years, making installing solar panels more accessible for the average homeowner than ever before. 

Depending on how expensive your monthly electric bill is, you can save more than $40,000 on your utility bills over the lifetime of your solar panels. Plus, the average EnergySage customer pays off their loan much earlier than their loan term – usually in less than 10 years. Paying your loan off early also means you don’t have to be scared off by today’s higher interest rates, either, because you won't be stuck paying them for 20 years. Solar panels pay typically for themselves in less than 10 years. 

The average homeowner doesn’t necessarily have $20,000 - $30,000 on hand to pay for solar panels, which is why taking out a solar loan is one the most common ways to finance a solar energy system. You can also finance your solar energy system with other types of loans such as a home equity loan and or HELOC. We'll walk through all of your choices and explain why they do or don’t make sense for your particular financial situation when it comes to paying for solar panels.

Disclaimer: This article is intended to provide an informational overview of solar loans for interested homeowners. It's not intended to serve as official financial guidance. Readers interested in installing solar products should use their best judgment and seek advice from a professional before making any purchase or investment decision.

Have you ever taken out a loan for a home renovation project? Solar panel loans are similar to home improvement loans, which are used to pay for projects like remodeling your kitchen, upgrading an HVAC system, or adding a new bathroom. Like these other types of loans, when you borrow money from a lender to finance a solar panel system, you agree to pay it back with interest in monthly installments over a fixed loan term.

Solar loans have the same basic features as other types of loans. As you compare your solar loan options, you'll want to consider all the features of the loan, including: 

• Loan term: the length of your loan, which is usually anywhere from 10-20 years for solar loans. Most solar loans allow you to pay back your loan early without prepayment penalties.

• Interest rate: the amount your lender charges you to borrow money, which is a percentage of the total loan amount.

• Fees: any additional charges the lender assesses at the loan initiation.

• APR: The APR is the most important number to look at because it factors in both the interest rate and the fees, expressed as a percentage. The APR gives you a more complete picture of what you’re actually paying to borrow the money.

How do solar loans work?

Principal

Your principal is the initial amount of your loan or the total amount you borrow to pay for your solar system, and doesn’t include the interest you will pay on your loan over time. Depending on how your loan is structured, your monthly payments will go towards paying off your interest and part of your principal balance. It’s worth asking your lender if you can make payments that go solely towards your principal balance, as that will help pay off your loan faster and cut down on the interest you owe over time.

Financing term

Financing term is simply another way of saying "loan term," "loan length," or "loan contract," and refers to the length of your loan or the maximum length of time you'll be making payments. Your financing term impacts what your interest rate is, how much your monthly payment is, and how much you’ll ultimately save by going solar. The longer your loan term, the more interest you’ll pay over time, which eats into your savings.

Fees

Like most loans, solar loans may come with typical fees like closing costs. However, one large fee solar loans often have that other loans don’t is a dealer fee, which is similar to an origination fee for a mortgage. These fees can be either a flat amount or a percentage of your total solar loan amount.

• Dealer fee: also known as an initiation fee, loan fee, or lender fee, solar lenders sometimes charge a premium to cover their lending risk. There's no industry standard dealer fee, so it'll vary depending on who is offering the loan. Dealer fees can be as high as 30% of the total cost of your loan, which significantly increases the cost of your loan. They often take homeowners by surprise, so it’s important to ask upfront what the fee might be to determine whether taking out a solar loan still makes sense. If the dealer fee is too high, you can look into taking out a home equity loan or HELOC, or look into personal loans that don’t charge origination fees.  

• Closing costs: occasionally, your solar loan may have closing costs which are charged to cover your loan provider administering and servicing your loan.

The true cost of your loan will depend on your interest rate, how much your dealer fee is, your loan term and the cost of your solar panels. If you choose a longer loan term, you'll pay more in interest, but your monthly payments will be less than if you take out a shorter loan. If you can afford to make higher monthly payments, you'll save more over the long-term.

Long- or short-term loan: which should you choose?

EnergySage data shows that most homeowners pay off their solar loans in about seven to nine years, even if they take out a 20 or 25 year loan. With this in mind, some homeowners choose a longer loan term to keep their monthly expenses low and pay off the loan when they have the money available. It's important to check whether your lender charges a prepayment penalty before taking this approach.

When you take out a loan, you're eligible to receive the federal solar tax credit after you install your solar system, which allows you to claim 30% of your solar system's total cost on your taxes. If you use your solar tax credit to pay off some of your loan's principal, you'll have even less to pay in the long run. Some solar loans, known as re-amortizing loans, are structured to consider this and adjust your payment amounts based on when you are receiving your benefit from the tax credit. Even if you don't take specifically take out a re-amortizing loan, you can still use your savings from the tax credit to pay off a large portion of your loan's principal.

Should you choose the loan with the lowest interest?

Different lenders offer different interest rates, and if you've shopped for a mortgage or a car before, your eye may be trained to seek out the option with the lowest interest rate. However, when shopping for solar loans, it's especially important to consider all the fees mentioned above – not just the interest rate – to ensure you get the best deal and the loan that works best for you. 

Solar lenders often use origination or dealer fees to subsidize artificially low-interest rates for their loan products. In other words, they can charge you a lower interest rate because they charge you higher fees upfront. Those higher fees often cancel out any benefit the low interest rate was providing, which is why you need to factor in all of the fees in addition to your interest rate when figuring out what type of loan will save you the most money.

Dealer fees can be as high as 30% — sometimes even higher — and are often hidden in the financed price of the loan (be sure to inspect your quotes and ask installers what the differences between the cash price and the financed price is). So even if your interest rate is low, you'll be paying 30% more for your solar panel system, negating any benefit you may expect from selecting a loan with a lower interest rate. We encourage you to consider the total cost of financing of your solar panels rather than relying on the interest rate alone to evaluate your loan options. A loan with no dealer fee may have a higher interest rate, but in most cases, you'll pay less for your panels overall if you select this option, mainly because solar loans aren't usually held for the entire loan term (most homeowners pay off their loans in seven to nine years).

Solar loans come in different packages like any other financial option, with varying structures, terms, and conditions. Let's explore what to consider when finding the right solar energy loan:

Secured vs. unsecured loans

You can categorize most loans into two general buckets: secured and unsecured loans. Secured loans require an asset that will serve as collateral for the loan – in most cases, that asset will be your home, which means your lender can foreclose on your home to pay themselves back if you default on your loan for any reason. Unsecured loans, on the other hand, don't require any collateral other than the solar equipment itself. Here are the major differentiating factors between the two loan types:

Secured solar loans vs. unsecured solar loans

Amortized vs. re-amortized solar loans

Your solar loan will either be amortized or re-amortized, and each type has benefits and drawbacks. You'll find that most secured loans are amortized, meaning you have a set monthly payment and terms. In contrast, most unsecured solar loans are re-amortized, which means you pay a lump sum after a certain amount of time (usually approximately one year), and then your payments reduce after that lump sum payment.

Other types of loans may offer better terms and rates than solar-specific loans, so it's worth looking into all of your options. For example, you can tap into your existing home equity by taking out a home equity loan or a home equity line of credit. You can also consider signing a lease or power purchase agreement (PPA) , but we tend not to recommend going this route because you won't own your solar panels at the end of your contract.

Home equity loans

Taking out a home equity loan is when you borrow against the equity you've built up in your home, and you receive the money as a lump sum. They are secured loans, because your home is the asset that serves as collateral to secure your loan. The benefit of a secured loan is that they tend to have lower interest rates, but the downside is that if you default on your loan for any reason, your lender can repossess your house to pay themselves back. Home equity loans also have added tax benefits because the interest you pay on them is tax deductible. Most home equity loans are fixed-rate loans, meaning you'll have predictable monthly payments that won't change over the lifetime of your loan.

HELOC

A home equity line of credit, or HELOC, is similar to a home equity loan in that it's a loan secured by your home and the amount you can borrow is based on your existing home equity. But HELOCs are a revolving line of credit, which means they function similarly to a credit card. You can withdraw money over an extended period of time, usually about 10 years, and you only have to pay back what you spend. Most HELOCs allow you to make interest-only payments during the loan's draw period, so your payments will be low for the first few years. HELOCs tend to have variable rates, however, so in a rising interest rate environment they may not offer the most financial benefits. The interest you pay on a HELOC is also tax deductible.

Lease/PPA

If you sign a lease, you'll still make fixed monthly payments just like a loan, but a third-party owner (i.e the solar company) installs solar panels on your property and then sells you the electricity you produce at a predetermined monthly rate. A PPA is similar, but your monthly payment isn't fixed and changes every month depending on how much electricity you use, because you're buying the power generated by your system at a fixed price per kilowatt-hour (kWh) instead. But at the end of either type of contract you won't own your solar panels, which is why we typically don't recommend them. Plus, you aren't eligible for the federal solar tax credit if you sign a lease or a PPA, which means you miss on out thousands of dollars of savings.

Solar loans have become increasingly accessible in recent years – and the number of banks and financial institutions offering solar loans continues to grow. 

If you're already getting a quote from a solar installer, they'll likely come to the table with a few different financing options. On the EnergySage Marketplace, you'll see your solar loan options when you receive solar installation quotes. Those loan options–and others you find directly–can come from a few different sources:

• Credit unions: Local banks and credit unions all over the country offer standard personal loans as well as energy loan products for homeowners. You can often find some of the lowest-cost, most advantageous loan options here! 

• National lending institutions: Solar is growing in popularity, and big banks are jumping on board. Many now offer specialty loan products tailored to residential solar panel systems.

• Public-private partnerships: Local government agencies often partner with private lenders to offer solar loans with low interest rates and no fees.

• Utilities: Some utility companies offer competitive on-bill financing programs that allow you to finance solar energy systems and repay the borrowed amount as part of your monthly electric bills.

• Municipalities: Though not available in all states, some municipalities offer Property Assessed Clean Energy (PACE) solar energy financing. When you finance a system with a PACE loan, you repay it via an annual assessment on your property tax bill.

• Specialized solar lenders: Many companies today specialize in–and solely provide–solar loan products. They partner with banks and a network of solar installers to offer loans.

Check out EnergySages's solar loan lending directory. If you get a solar loan quote through EnergySage, our team of Energy Advisors can help you understand your options and what you're looking at with your various offers.

Once you understand your solar loan options, you'll need to determine whether or not a solar loan is right for you – here are some of the significant advantages and disadvantages of solar loans:

Pros and cons of solar loans

Pros of solar loans

The pros of a solar loan tend to outweigh the cons if you're interested in owning your solar system, but if you don't currently have the cash to go solar. Loans offer predictable monthly loan payments so you never have to worry about your bill going up. It's also likely you'll be able to pay off your loan ahead of your loan term, which will save you thousands of dollars.

Cons of solar loans

If you're interested in breaking even on your investment in solar as soon as possible, paying upfront in cash is the better option if you can afford it. If you decide to take out a solar loan, you'll likely have to pay expensive fees that greatly increase the cost of the loan. Even if you have a low interest rate, the fees will make your loan much more expensive. Additionally, if you're interested in a solar-plus-storage system, some solar loans don't cover storage.

Choosing the right solar loan can help you maximize your solar savings quickly. You want to make sure you understand what fees you're responsible for paying, when you need to pay them, and how these fees impact your overall payment structure and payback period. Make sure you ask your lender about if there are any fees hidden in the fine print - for example, a prepayment penalty, which means you'd be charged a fee for paying off your loan early.

With this in mind, we created a checklist you can use to ask your installer or lender about your solar loan:

1. What is the difference in the cash price? 

The difference between the cash price and your solar loan quote is what you're paying in fees and extra loan charges. Before deciding how to finance your system, it's worth asking your installer what the cash price is to ensure you get the most affordable deal. If you're able to pay in cash, you'll pay less overall for your system since you avoid any interest and additional loan fees, allowing you to reap the benefits of your solar savings much more quickly than if you finance your system. You should also factor in all available rebates and incentives (like the federal solar tax credit) that will result in a lower upfront cost. 

2. What are the interest rate and loan term?

Confirm the length of the loan and the interest rate you'll be paying. This is shown in your EnergySage quote online and should be in your loan paperwork if you use a lender outside of EnergySage. Ensure you understand if any changes will happen to your payments throughout the loan. Sometimes you'll see higher monthly payments outlined for the first year or so of your loan term, which means it's a re-amortizing loan and your lender taking into account the tax benefits you'll receive from the 30 percent investment tax credit. You also want to make sure you have a fixed rate loan, because if you take out a variable rate loan you could be on the hook for higher monthly payments if interest rates go up.

3. What is the fee? 

Confirm the fee you're paying, whether an origination or dealer fee. Refer to our definitions of both fees earlier in this article to determine what happens when you agree to either as part of your loan. Be sure to read all of the fine print in your loan agreement because dealer fees can often be baked into the cost of your entire solar system and aren't always readily apparent.

4. Are there any prepayment penalties?

EnergySage data shows that many solar loans are paid off earlier than the agreed-upon loan term, meaning many homeowners are prepaying their loans. Luckily, most solar loans don't have a prepayment penalty, which is a charge for making payments on the principal of your solar loan and paying off your loan early. But it's still smart to ask and confirm in any loan documentation if there is one.

Do banks offer solar loans? 

Many different finanical institutions offer solar loans, including local and national banks, specialty financing companies, solar manufacturers, and credit unions. In fact, a loan from a bank may often be the smartest choice when taking out a loan to pay for your solar installation. While solar-specific loans tend to have low interest rates, they often come with expensive dealer fees baked into the loan contract, which can cancel out the benefit of the lower interest rate. A standard personal loan will typically come with a higher interest rate than a solar loan, but have much lower fees. When choosing a loan, you need to take both into consideration. That’s why looking at the APR of your loan – and not just the interest rate – is usually the best way to decide if the loan is actually a good offer or not. The APR represents the total of the fees and interest rate combined, which gives you a more accurate picture of what you’re paying for. 

How long can you get a solar loan for? 

Solar loan terms typically range from eight to 20 years. According to our data, most EnergySage customers pay off their loan in less than 10 years – long before the loan term they actually signed up for. So even if you take out a 20-year loan, it's likely that you'll pay it off years earlier, which saves you thousands of dollars on interest.

Can you get a solar loan with low credit?

Yes, you can get a solar loan even if your credit score is less than ideal. You're likely to see higher interest rates and monthly payments, but an increasing number of solar loan providers are offering loans that don't have credit requirements. Learn more about going solar with low credit.

Are solar loans worth it?

In most cases, yes. A solar loan or another type of loan such as a personal loan are your next best options if you can't buy your solar system upfront in cash. Plus, you'll still qualify for tax benefits like the federal solar tax credit just as you would with a cash purchase.

Are solar loans tax deductible?

That depends on the type of loan you choose. If you take out a secured loan such as a home equity loan, the interest you pay on the loan is tax deductible if you use the money for a home improvement project like going solar. However, if you take out an unsecured loan such as a personal loan, the interest isn't tax deductible. If you take loan, you're eligible for the federal solar tax credit It’s important to consult with an accountant or CPA to confirm any tax benefits and understand your potential savings.

Sign up on EnergySage for free to connect with installers in your area who offer financing options or find trusted local solar lenders. Using your EnergySage account, you can compare multiple quotes and financing options side-by-side to figure out which option will save you the most money. You can also talk to one of our Energy Advisors for free to get a better understanding of whether or not solar makes sense for you and your personal financial situation.