This is the guide the other guy doesn’t want you to know. This is the quiet part said out loud. This is the inside scoop on solar financing.
Financing a solar electricity system can be confusing. Making an informed decision will greatly improve your experience, and we are here to help you do that. There are several ways to finance your solar panel purchase, and which one is right for you depends on a variety of factors. The options used for financing are the following:
Common in Florida
- Pay Cash
- Traditional Solar Loan
- No Fee Solar Loan
Uncommon in Florida
- Home Equity Line of Credit, Loan, or Mortgage
- Unsecured Consumer Loan
- Lease
- Power Purchase Agreement
Below we will explain each option and the pros and cons. We will also alert you to some pitfalls and risks.
Cash
Cash is king. There is no question that if you can pay cash, you will reap the best financial benefits. A cash purchase is essentially prepaying for your future energy for 25 years and beyond. You keep the tax credit and the future stream of income is essentially a tax free dividend (since you normally pay your electricity bill with after-tax income). It’s like an annuity, but the payments keep growing as utility electricity rates keep increasing. It’s a great hedge against utility rates going up.
On the downside, you tie up your capital that might be used for other investments. However, you would be hard-pressed to find a 25+ year investment with a better return on investment and similar risk.
If you sell you home, you should be able to recoup the depreciated value of the solar panels in the selling price. Many homebuyers are looking for energy efficient and eco-friendly homes these days.
Traditional Solar Loan
Because solar panels typically have 25 year warranties, financial institutions offer a variety of long term loans ranging from 12 years to 30 years, with the 25 year loan being the de facto standard in the industry. You will see these loans offered with amazingly low interest rates – impossibly low interest rates, in fact. A popular rate is 1.99%, but you might see anything from 0.99% to 4.99% for most offers.
The solar energy industry in Florida likes these loans because usually you can get the monthly payment below the amount of energy you are saving on your electricity bill. You pay the third-party lending institution rather than the electric company for the portion of the bill you are offsetting. The idea here is that as the utility rates go up, your payment stays the same. A lot of the advantages of this type of loan happen years from the time you get your solar panels, which is still a huge benefit, and a great hedge against rising rates.
But how does the bank loan you this money at such a low rate for such a long time, especially considering that it’s not usually secured by a lien on your property? They charge fees to buy down the rate. These are known as dealer fees, because the solar dealer pays them a fee to give you a great rate and a low payment. Because these fees are costs to the dealer, they are rolled into the price you pay, and the amount of the loan you take. The fees are almost never disclosed because the dealer is contractually barred from sharing what they have to pay the bank. But the amounts can be substantial.
In a way, this type of loan is like paying points on a mortgage. You are paying a fee that’s rolled into your loan amount to get a great rate. This works great if you plan to make the minimum payments for the term of the loan. If you plan to sell the home early in the loan, this might not be the best option for you since you will have essentially prepaid interest that you will never get back. Just like a mortgage, paying points is not advised if you plan to refinance or not carry the loan to term.
Still, this is the best route to go if you need the low payment and plan to pay off your system over the long term. Your payment will almost definitely be less and less than the utility bill saved over time.
Some people may be better served by paying a higher interest rate, which will lower the amount financed. You are less likely to be “upside down” if you do that. If you are offered a low rate and it is not in your best interest to “pay the points,” you can ask for a higher rate and see what that does to your purchase price and loan payments. Often dealers only offer a handful of loan rates, and sometimes only one.
One very important caveat to these loans is the tax credit. These loans require that you remit the amount of your tax credit to the bank within 17 months to keep your payment low. If you fail to get your tax credit and turn it over to the bank, your payments will go up. The amount is disclosed so you should have no surprises, but be keenly aware of this and consult your tax advisor to be sure you will get the money you need to make this voluntary payment.
No Fee Solar Loan
This is a relatively new form of solar loan that can have fantastic benefits over the traditional solar loan, but also has drawbacks. These loans can be up to 25 years, just like a traditional loan. No fee solar loans feature, as the name implies, no loan origination costs from the bank and no costs to the dealer. You can often get these loans at the same price you would get by paying cash for your solar panels. Your loan amount is exactly the same price you would pay if you were paying cash. This is a huge development in the industry.
But these loans will naturally have a higher interest rate. Still, since your initial loan amount will be substantially lower, the higher interest rate should result in only a small increase in the monthly payment, still making solar affordable as a hedge against increasing utility rates.
And one of the best features – you get to keep the tax credit! You can use the money to pay all or part of your monthly payments, make a principal balance prepayment at any time with no penalty, invest the money somewhere else, or take a vacation or enjoy it any way you see fit!
This loan is far better if you might sell the house early in the loan because your loan balance will be lower. It also works great if you plan to pay the loan off faster or if you expect to come into money that you will use to pay off the loan early.
There are drawbacks. The qualifications are greater and the loan amount maximums might be lower. Also, if you just make the minimum payments for the term of the loan, you will pay more principal and interest in total than the traditional loan, but you can weigh that against the tax credit you will get and how you intend to use it.
This loan provides a lot of flexibility, and should be considered by many who get fixated on the low interest rate and low payment from a traditional loan offer.
Home Equity Line of Credit, Loan, or Mortgage
Using the equity in your home to improve your home has always been a go-to strategy. A line of credit could be a great way to finance a purchase if you are waiting on money coming in, but can be very risky in a time of increasing interest rates. But you can make the minimum payment, usually just the interest on the loan balance.
Home equity loans with fixed payments will rarely have terms like 25 year solar loans, so the payments will be substantially higher, and will exceed the money you are saving on a utility bill. But if you want to pay the loan off quickly with reliable payments that fit your budget, this could work out well. If you are able to get tax benefits from a mortgage deduction, you could also benefit, but tax law changes have made that harder to get.
If you are lucky enough to make a solar panel purchase decision with the building or purchase of a new home, you may be able to roll the cost into your 30-year mortgage, which could be the ultimate way to finance solar panels since the added payment will be minimal. But this eliminates the ability to pay off the solar portion of the loan early and reduce your monthly loan payments.
Because of the challenges and the daunting paperwork, not many people finance solar panel purchases these ways.
Unsecured Consumer Loan
There are numerous ways to get unsecured credit, but the most popular is a credit card. You will probably have to pay a higher price because solar dealers incur fees for accepting credit cards, but this might be something to consider if you have a promotional rate and just need to finance for a short period while you wait for money to come in. The interest rates on unsecured consumer loans would probably make investments in solar panels unattractive, and few go this direction.
Side note: people put smaller purchases on credit cards all the time for things like solar pool heaters, which can cost under $5,000 in many cases.
Lease
Leases are not popular in Florida, but they are offered and they are legal. The financial institution maintains ownership of the solar energy system. They take the tax credit. You just make monthly payments until the system is paid off and then you can usually buy it for $1 or something like that. The main benefit is that the lender usually maintains the system, meaning if it becomes inoperable, you don’t have to pay. But solar energy systems are extremely reliable, so this might not be that big of a factor.
The main drawback of leases is that they are generally designed for you to break even and the bank to make all of the money. Escalation clauses allow the lender to increased your lease payments as electricity rates go up, eroding your savings over time and completely destroying the best feature of a solar investment – hedging against rising rates. Essentially, the bank benefits from increasing utility rates and inflation in general.
When you have nothing out of pocket and no risk, you are not going to get a good return on your investment. The bank wins – you don’t. Leases might be okay for people who can’t take advantage of tax credits, but are really a very small part of the solar industry in Florida and for good reason.
Power Purchase Agreement
Power purchase agreements (PPAs) set the solar industry on the path to mainstream in other states. In this type of financing, you do not own the solar panels. A third party (lender) is willing to put panels on your roof for free, in exchange for you agreeing that you will purchase all of the power the panels generate over time. The bank keeps the tax credit. The rate for energy is pre-established and usually has an escalation clause, so your price for energy will continue to increase over time. This is a great way to get into solar without any up front costs, but the benefits to you in Florida would be minimal because energy rates are relatively low here.
However, PPAs are illegal in Florida. We are in one of few states that have laws protecting the monopoly utility companies. Only regulated utilities, co-ops, and municipalities can sell power to consumers. In a PPA, the bank is essentially selling you power, so they would need to be regulated to legally do that in Florida.
What Financing is Best For the Solar Contractor
If they are doing it right, the solar dealer does not really care how you finance your solar panels. In the end, the solar dealer should pocket the same amount of money whether you cut them a check or if a third party lender sends them payment. The only difference is when the money comes in. Some contractors can’t afford to float the cost of materials and labor for your project, so they either take large deposits, require progress payments, or their lending institution charges them more to provide milestone payments up front before work is complete.
We are indifferent regarding your financing choices, which is the way it should be – we offer the best options we can and you make the right choice for your situation.
What Financing is Best for the Consumer
This is harder to answer because everyone’s situation is different. Some questions you have to ask yourself, in no particular order, are:
- Am I eligible for the tax credit and will I get it all in the first year (unearned tax credits can typically be carried forward to future tax years).
- How long do I intend to stay in the house and what happens if I decide or if am forced to sell?
- Do I want to tie up my capital or do I have cash available to make this purchase without getting the principal back quickly and easily?
- Is there a good chance that I will be able to pay off a solar loan early?
- What are my goals? Maximum ROI? Hedge against rising rates? Maximum environmental impact? Offsetting my entire utility bill or part of it? Improve my home’s value?
- If I don’t outlive the loan or investment, what will likely happen (and does that even matter to me)?
- How certain/uncertain am I amount any of the above questions?
Some of these questions can be uncomfortable. Finance and tax questions are a very personal space that we certainly don’t want to invade. But we are here to help you make an informed and intelligent purchase decision. Hopefully this guide can point you toward the right option for you.
Most people will select from the common financing options above: cash, traditional solar loan, or no fee solar loan. Often the decision, if you don’t have the cash, is which loan option is best based on the caveats, risks, and benefits outlined above. All three are great ways to buy solar panels, but we don’t want you to make a mistake that you regret by choosing a suboptimal way to finance your solar purchase.
Final Words
This is not intended to be a complete study on all of the terms and conditions and small print found in various financing products. For example, some loans allow you one or more reamortizations, so you can lower your payments by paying a prepayment. That’s another benefit we didn’t discuss above, and it could be important to you. There are too many variations in loan products for this article to be all inclusive. We encourage you to read the terms of all financing paperwork carefully. Consult with a trusted person you know or professional that you hire if you are unclear on your options.