Solar financing: What you need to know

Whether you’re interested in installing solar panels to cut your energy bills, become energy-independent, or both, you're not alone. Solar has experienced an average annual growth rate of 24% in the last decade, according to the Solar Energy Industries Association. Here’s what you need to know about the average cost of solar panels, how they can save you money, and how to finance that purchase if you decide it’s right for you.

How much do solar panels cost?

The cost of installing solar panels has actually fallen by more than 50% since 2013, according to the Solar Energy Industries Association's research. Per its analysis, you can expect to spend an average of about $25,000 to install an average-sized residential system.

There are two specific types of expenses related to installing solar panels:

• Hard costs: Hard costs refer to the actual materials involved — the solar panels themselves and the hardware used to install them.
• Soft costs: Soft costs are all of the non-hardware costs of installing a solar power system. These include things like sales tax, labor, permits, and inspections, according to the Office of Energy Efficiency and Renewable Energy. They also include the expenses that companies often pass on to customers, such as supply chain costs, sales and marketing, and general administrative costs. They estimate that these soft costs end up making up as much as 65% of the cost of going solar.

How much can you save with solar panels?

There are a few ways that you can save money and see financial benefits from installing solar panels. Here are the biggest ones:

• Electricity savings: The biggest savings benefit is generally a reduced utility bill. Exactly how much you save on your electric bill will depend on your usual energy consumption, the size of your solar energy system, how much direct sunlight you get, the size and angle of your roof, and your local electricity rates, according to the U.S. Department of Energy. For one example, Illinois Solar for All, a state program, reports that single-family homeowners who used their program to install solar panels reported saving more than $1,000 a year on average.
• Home value: While this isn’t necessarily saving you money, solar panels can boost your house value. Homes with solar panels are listed for 48% more than the average home price in the area, according to a study by Porch.com.
• Government rebates and incentives: Another way to save money on solar panels is to take advantage of the government programs available. A major incentive is the federal solar tax credit of 30% if you install a home solar system between 2022 and 2032. That means that 30% of the amount you spend on an eligible solar power system can be deducted from your owed taxes. You may also be eligible for other state and municipal rebates and incentives — search this database with your zip code to see if there are any available in your area.

Let’s say you pay $25,000 to install a solar power system for your home. When you file your taxes that year, if you claim the federal solar tax credit, you can claim a tax credit for 30% of that cost, which is $7,500. If you owe $8,000 in federal taxes that year, with that credit applied, that amount will drop to $500.

Now say that you’re also seeing significant annual energy savings of $1,000, similar to what the Illinois state program is reporting. Within 18 years, your solar power system will have paid for itself, and will continue to save you money going forward.

How does solar financing work?

There are multiple types of solar loans that can be used to finance your solar panels, including personal loans, government loans, and in-house financing via your contractor. Whatever method you choose, many of the considerations are the same, including competitive interest rates, a reputable lender, and an affordable monthly payment.

Before you finance a solar panel installation, determine which type of solar panels are right for you and your home.

• Silicon solar panels: These panels are the most popular type of solar panels, making up over 95% of those sold today, according to the Environmental Protection Agency. They’re efficient and last a long time — 25 years or longer. There are two types of silicon solar panels:
  • Monocrystalline solar panels: These are the highest-efficiency panels, in the 15-20% range, and are expected to last for up to 40 years. However, for that excellent performance they do come at a higher cost.
  • Polycrystalline solar panels: These are slightly less efficient, in the range of 13-16%, and a lifespan of up to 35 years. They’re less expensive than monocrystalline panels, but because they’re less efficient you may need more space to generate the same amount of energy.
• Thin-film solar panels: Thin-film solar panels are made with different materials from those mentioned above, and are fast and easy to manufacture and install. They typically last for 10-20 years, giving them the shortest lifespan of these three types — but they’re also the least expensive.

How to finance solar panels

If you’ve decided to install solar panels and determined which type is right for you, it’s time to think about how to finance your new energy system. Here are some of the most common financing options and some pros and cons to keep in mind for each.

Personal loans

Personal loans are a common financing option for all sorts of purchases due to their flexibility and wide availability. Personal loans are generally unsecured, meaning instead of being backed by something like a home or car, they are based on your credit profile and history. The lender then determines how likely you are able to repay the loan in full with your information.

Pros: 

• No collateral required: An unsecured personal loan will not put your assets, such as your home or car, at risk if you find you cannot make your payments.
• Fixed monthly payments: Since personal loans generally have a fixed APR, you don’t have to worry about your monthly payments changing each month. They stay the same over the life of your loan.
• Long repayment terms available: Some lenders offer repayment terms of up to 15 years for personal loans used for home improvements, which can make budgeting for solar panel payments more affordable.

Con:

• Possibly high interest rates: Personal loans may charge high annual percentage rates (APRs) relative to home equity loans or you may not qualify for a large enough loan, especially if you have a low credit score (670 and below) or a high debt-to-income ratio (over 36%).

Home equity

A home equity loan is a loan that uses the equity you have in your house to borrow money. This is a secured loan, backed by your house. Because of that, it may be easier to qualify for the amount you need and for a competitive APR. However, your house must have equity in order to qualify.

Pro: 

• Lower APR and larger loan amount: You might find that you qualify for a lower APR and a larger loan amount using your home equity to back your loan, rather than depending on your credit history.

Con: 

• Possible loss of your collateral: If you default on the loan, you may lose your home.
• Must pay off the loan if you sell: If you sell your home, you’ll need to pay off the loan in full.

FHA limited 203(k) loan

These government loans, insured by the Federal Housing Administration (FHA), are intended to allow homeowners to borrow up to $35,000 to repair or improve their home — and that money can be used for solar panels. This loan is financed within your mortgage and offers a simplified option to pay for home upgrades.

Pro: 

• Lower rates: Rates may be lower than other options, especially for those with poor credit, and the process can be simplified and faster.

Con:

• Can be more expensive: Loans obtained through the FHA may be more expensive than traditional loans for borrowers with good credit scores.

Finance with a contractor

Some solar panel installation companies will offer in-house financing. This is when the contractor will offer you a loan to cover the cost of its services. This type of financing can make borrowing easier, as you won’t have to go back and forth between your contractor and a lender.

Pro:

• Streamlined process: In-house financing can be convenient and streamline the process, getting the project started faster.

Con: 

• Might not be competitive: The rate that they quote you may not be competitive, and you may be able to get a lower-cost loan via another financing option.

Solar leases

A solar lease means that instead of buying your own solar panels, you rent them. While this can mitigate some of the challenges associated with solar panel installation, it can also lessen many of the benefits.

Pro: 

• Lower cost: The cost can be lower, especially upfront.
• No responsibility: You won’t have to worry about installation, maintenance, or upkeep.

Con: 

• Difficult process to sell: It may be difficult to sell your home if you’re leasing the solar panels. You’ll have to either transfer the lease to the new homeowners, or buy the panels outright from the company.
• Lower energy savings: The monthly payment may offset any energy savings, not saving you as much as you may have hoped.

Power purchase agreements

A power purchase agreement (PPA) means that a contractor will install a solar energy system on your property at low or no cost, then sell the energy to you at a fixed rate.

Pro: 

• No financing required: You will be able to enjoy the lower energy costs associated with solar power without having to finance the installation of solar panels yourself.

Con: 

• Complex contracts: The process to refine the details of the contract can be more complex, as it needs to go through multiple hands before it can be signed.
• Buyers may not want a PPA: If you decide to sell your home, some buyers may not want to buy a home with a PPA.

No matter which option you end up going with, shop around and compare terms to find an option that works for you.

FAQ

What are the benefits and drawbacks of solar financing?

The benefits and drawbacks of solar financing are similar to those of all loans. Solar financing allows people who could not afford to pay for solar panels out of pocket to still afford them, but financing almost always costs more than paying cash.

Are there any tax incentives available for solar financing?

Federal solar tax incentives are still available with most forms of financing. If you are paying for your system yourself, you can claim the tax credit. However, if you are renting the panels or buying the energy without owning the panels, you are not eligible for the tax credit.

Can I finance a solar project with bad credit?

Some financing options will still be available to you, even with a low credit score, though bad credit will limit your choices and likely make your cost of borrowing higher.

Where can I get solar financing?

Many banks, credit unions, and online lenders will offer personal loans or home equity loans that you can use to finance solar panels. Additionally, you can look into working with a contractor with in-house financing options or with FHA limited 203(k) loans to facilitate the purchase.

What factors should I consider when choosing a solar financing option?

When financing solar panels, look for low APRs, manageable monthly payments, a reasonable repayment term, a lender with a good reputation, and minimal fees.