Understanding solar loan fees: Complete overview

If you want to add solar panels to your home but you can’t afford to pay for them upfront, a solar loan may be a good option for you. Solar panels are an expensive initial investment, but they more than pay for themselves over time, which is why it makes sense for many homeowners to take out a loan to cover the upfront cost.

A typical 10-kilowatt solar installation can cost anywhere from $20,500 to $25,800, and taking out a solar loan will help you finance that cost over time. Many factors impact how much your solar loan will cost, including your credit score, the loan's interest rate, and any additional fees. We’ll break down the most important terms and fees you need to understand so you can feel confident about which type of solar loan is right for you.

Before diving into solar loan fees, it's essential to understand the two main types of solar loans available if you choose to finance your solar investment: secured and unsecured loans.

Each loan has unique benefits and drawbacks that will have different interest rates and associated fees. A secured solar loan requires you to put your home up as collateral, which is a significant risk because if you fail to make payments, your lender can repossess your property. An unsecured loan doesn’t require collateral, which means the lender takes on more risk themselves -– therefore, these loans typically have higher interest rates. Taking out a loan is a common way to pay for solar panels given how expensive they can be. About two-thirds of EnergySage customers ask for information about solar loans when requesting quotes from our Energy Advisors, according to our Marketplace data.

Solar loans vs. solar leasing fees

Solar leases are another financing option that requires you to make regular monthly payments, but we don’t usually recommend leasing as you won’t own your solar panels at the end of the agreement. Despite having spent almost the same amount of money on the panels over time, they’ll be removed from your roof when your lease is up, which means there’s much less financial upside for you as the homeowner.

With a lease, you also can’t cash in on the federal solar tax credit, or ITC, which is one of the most valuable incentives available to you if you purchase your panels outright or with a loan. The ITC allows you to claim a 30% credit on your federal taxes for the total cost of your solar system, saving you thousands of dollars on your investment. If you choose a lease, however, the leasing company gets to claim the ITC savings and not you, which is a major downside of leasing.

Why is my monthly payment higher for the first year of my solar loan?

Some homeowners choose to take out a re-amortized loan, which is structured differently than a standard loan. About half of the solar loans quoted on the EnergySage Marketplace are re-amortized loans. With a re-amortized loan, after year one of your loan you can make a lump sum payment to lower your principal balance and receive new, more favorable loan terms. So if you choose a re-amortized loan, that’s why you'll notice higher monthly payments on your solar loan quote for the first year of the loan. As an example, if you have a 25-year re-amortized loan, years two through 25 will have a lower monthly payment than year one. So if your monthly payment in year one is $52, it will be closer to $36 after year one.

This payment structure is because lenders are taking into account your investment tax credit (ITC), which allows you to to claim a 30% credit of the total cost of your solar energy system from your federal taxes, which saves you thousands of dollars. Your lender assumes you’ll use that part of your tax refund to pay off a higher portion of your loan during year one, which is why they allow you to re-amortize. It's important to note that this isn't the case for everyone depending on what you owe in taxes that year. If your tax bill doesn’t allow you to apply the ITC the same year you take out your solar loan, you can roll it over and receive the credit the following year. A tax professional can help you determine whether you’ll qualify for the ITC the same year you take out our loan. 

If you choose to go with a standard loan that doesn’t re-amortize, you’ll have consistent monthly payments over the lifetime of your loan that will never change. Talk with your lender about options to determine the best one for you.

It's typical for almost any loan to have fees associated with it — from mortgages to personal loans, there will almost always be additional lender fees you need to be aware of. Before deciding on a solar loan, get fee information upfront. For example, is it a one-time fee or an annual fee? Does it increase every year if it’s an annual fee? Solar loans are just like loans for any major purchase: You want to fully understand what you'll be paying each month, as well as what the total cost is over the loan's lifetime.

Origination/dealer fees

Most solar loans have fees, such as an origination fee, also known as a dealer fee, or closing cost fee. The most common fee for solar loans is an origination or dealer fee, which is similar to an origination fee on a home loan. This is the fee for administering the funds and covering the risk associated with the loan, since the lender is taking on some risk that you'll pay the loan back. There's no industry standard dealer fee, so it'll vary from lender to lender, but you can typically expect the fee to range anywhere from 15% to 30% of the total loan amount.

Closing costs

Occasionally your solar loan may have closing costs, which are similar to an origination fee in that you must pay the fee when closing on your loan. Closing costs are most often recorded as a flat fee, but they can also be a percentage of your total solar loan amount, although it’s less common. Make sure you ask your lender to explain all of the details about your loan, including the interest rate and fees, so you’re not on the hook for any unexpected costs.

Separate from any loan fees is the interest rate you’ll be charged for your solar loan. Your interest rate depends on your credit score and current debt, among other financial factors. Just as with other loans, lenders will usually offer you a lower interest rate if you have an excellent credit score. A FICO Score of 800 - 850 is considered exceptional and typically earns you the lowest interest rates. It's important to note that even if you have a low credit score, you can often still qualify for a solar loan, but it will cost you more in interest, so your monthly payments will be higher. If you’re able to pay off any outstanding debt like credit card bills or a car loan, lowering your debt obligations should raise your FICO score and make you a more attractive loan candidate.

Any loan documentation from your installer or lender should clearly state your interest rate and fees. It’s vital to understand all of the terms of the loan you’re signing, so be your own advocate and ask as many questions as you need to. Just as your installer helps explain the solar panel equipment, your lender should explain the details of your solar panel financing and any other available options, too. After all, solar is an investment, and it's important that you understand the fine print of your new loan, especially because it can last for 25 years. If you don’t read your solar contract carefully, you could end up paying thousands of dollars more than you planned to over the lifetime of your loan.

Shopping around and comparing as many quotes as possible is the best way to find the lowest rates available to you, which you can do on the EnergySage Marketplace. The more lenders you speak with, the greater your chances of finding a cheaper loan. To avoid hidden solar loan fees, conscientiously review any loan documents to ensure you understand the fees you're paying upfront and any additional costs associated with your loan. You should also feel comfortable asking your potential installer or lender questions to make sure you’re clear about your fees, interest rate, and the overall cost of your solar loan.

Often, you can get a solar loan that requires putting no money down. A zero-down solar loan enables you to go solar without a large upfront investment, which is ideal for homeowners who don’t have that much available capital. While you'll pay more overall than a cash purchase because of interest and fees, depending on your loan terms, your new solar panels should save you enough on your electric bill to cover your monthly loan payments, and then some. With your ITC savings, any other state incentives and net metering (if your local utility offers it), you should significantly reduce your monthly costs and the length of your payback period.

You can join EnergySage today for free and connect with trusted local solar installers and lenders in your area. Through your EnergySage account, you'll be able to compare multiple quotes and financing options side-by-side to determine which one makes the most sense for your personal circumstances. Just curious who offers solar financing near you for now? You can also search for lenders in your area using our database.