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  • Writer's pictureSarah Lozanova

Solar Panel Financing: How Solar Loans Work And What Alternatives Exist

Updated: May 18, 2022

Many home and business owners want to install solar panels, but the upfront cost gets in the way. Often potential customers just don’t have enough savings to cover the expense. Even after applying the federal solar tax credit, many people need a loan to go solar. The good news is that there are a variety of solar loans available with attractive interest rates that require no down payment.

Depending on the cost savings from the solar energy system and the loan payments, customers may start saving right away, even after subtracting out the loan payment. Understanding the loan options available to potential customers is critical for turning leads into sales and delivering excellent customer service.

What Is A Solar Loan?

This solar financing option lets homeowners install a solar power system with no money down, so your customers will not need to exhaust their savings. Unlike a power purchase agreement (PPA) or solar lease, your customer will own the solar PV system. In addition, some financial institutions or utility companies offer loans catered explicitly to renewable energy systems, and other more general loan programs may apply, too.

Some programs are designed for home improvement loans, whereas others are specific to solar energy projects. For example, Sungage Financial offers loans for residential solar systems and has terms up to 25 years. Greenbiz Financial provides loans for solar PV systems and other energy-saving home upgrades. In addition, some solar installers partner with local credit unions to provide solar financing.

The rates and terms of solar loans vary by the financial institution and the type of financing, and depend on your client’s financial standing. Loans with lower interest rates and fees result in greater savings to your customers. Also, loans with fixed interest rates are more predictable, offering peace of mind to your customers.

Your customers often want to avoid loans with prepayment penalties and variable interest rates. The longer the term, the lower the monthly payments. However, loans with longer terms can increase the total interest paid on loans over time.

It is helpful to look for a solar loan option that results in your customer being cash-flow neutral or even positive when possible. This happens when the loan payments are less than the monthly electricity bill savings with net metering. Therefore, look for loan options with the lowest rates and fees.

Who Qualifies For A Solar Loan?

The requirements for solar financing options vary by the programs themselves. However, solar panel loans do commonly involve conducting a credit check and require a minimum credit score to qualify. Typically, customers will poor or fair credit scores do not get approved, while applicants with good and excellent credit do qualify.

If you have a customer with a low credit score, there are ways to increase this score over time. Many solar installers partner with a specific loan program to help streamline the process for potential customers.

Secured Vs. Unsecured Loans

There are two primary types of solar loans: secured and unsecured. A secured loan requires collateral to “secure” the loan and lower risk to the lender in case you default. Mortgages and auto loans are common secured loans. However, if your customer defaults on a mortgage, auto or secured solar loan, the institution could seize the collateral and sell it to pay off the loan.

Because secured solar loans tend to use the home as collateral, they often have lower interest rates than other loan options and sometimes the interest is tax-deductible. Secured loans can take a bit longer to process because banks may need to assess the value of the home, which can involve getting an appraisal.

Another option for your customers is an unsecured loan, like student loans, credit cards and personal loans. These loan options do not use an asset as collateral and function similarly to a credit card. Unfortunately, unsecured solar loans usually have higher interest rates, and the interest is not tax-deductible. As a result, these loans tend to be less desirable to potential customers.

What’s Covered Under A Solar Loan?

Often, solar loans cover the entire cost of a solar energy system, including solar PV panels, inverters or microinverters, power optimizers, racking systems, and wiring. In addition to the solar equipment, labor and permitting costs are also included.

Can You Finance A Solar Battery Installation Too?

Solar batteries are becoming a popular option for residential solar panel systems, but the upfront cost can deter some customers. Thankfully, solar loans commonly include the cost of a solar storage battery, such as the Tesla Powerwall or the Enphase Encharge. Often, solar loans are also a good option for households that already have solar and want to add battery storage.

In some states and utility territories, there are also battery incentives or rebates available. Also, the federal solar tax credit includes batteries for solar energy systems, reducing the net system cost.

Where To Find Solar Financing Options

If you partner with a financial institution or utility company to offer solar loans, make sure you are located in their service area. Unfortunately, some solar loan programs are only available in certain states. Credit unions might be a good option, but some may have eligibility requirements, such as residency requirements. National Banks often have both secured and unsecured loan options with various rates and terms.

Look for the loan options with the best terms for your customers. For example, many homeowners appreciate it when loan interest is tax-deductible and has a simple approval process.

Property Assessed Clean Energy Programs (PACE) are a popular option for home or business owners in some areas. The program is for paying the upfront cost of qualified home energy-efficiency upgrades. Unlike most home improvement loans, the PACE program is associated with the property itself and not the individual. These programs allow solar homeowners to pay the cost of the solar installation over years, often at a low-interest rate.

How To Apply For A Solar Loan

Some solar installers with relationships with financial institutions will help walk their customers through the application process. Commonly, applying for a solar loan requires a credit check and filling out an application. In some cases, the lender offers a simple application process and rapid approval.

However, some secured loans will take longer, especially if an appraisal is needed. Unfortunately, getting an appraisal can increase the loan fees.

Alternatives To Solar Loans

If there are local or state solar energy incentives available in your service area, make sure you are familiar with them. Some utility companies offer incentives, such as rebates for installing batteries. Several states offer state tax credits, reducing the net cost of going solar. Be aware of all the regional programs and stay current on these incentives, as they can change over time. For example, sometimes programs lapse when the funds are exhausted. If customers think they have a rebate coming and then don’t, it can be very disappointing.

One alternative to a solar loan is a solar lease or purchase power agreement (PPA). With a solar lease, the homeowner pays to lease the solar panels but doesn’t own them. For solar PPAs, the homeowner pays for the electricity their solar panels produce and a third party owns the solar system.

Although solar financing has become more popular in recent years, a solar lease or PPA might be a better option for some customers, especially if they can’t take advantage of the federal solar tax credit. For this reason, some solar companies offer solar leases and PPAs, especially if they have access to enough capital.

Knowing Solar Financing Options Can Help Clients Manage Solar Costs

Because the upfront investment is often the largest obstacle to closing, understanding solar financing options is critical. Sometimes, solar projects are cash-flow neutral or positive due to low-interest rates, low fees, and favorable loan terms. Finding desirable loan options for your potential customers helps provide a better customer experience while potentially boosting sales.

Permitting is another complex area to navigate when it comes to solar installation, Checkout our easy to use, free to sign up marketplace for permitting, design, and engineering needs!

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