Purchasing solar panels for energy is a good decision due to many reasons. It will save a lot of money by vanishing the use of grid energy. It is a significant investment and sometimes hard to buy through cash. But the good news is many other options to finance solar panels. This article is a complete guide to financing your solar panels this year.
How to finance solar panels?
Choose the most reasonable monthly payment option while paying the slightest overall interest. When choosing how to finance solar panels, consider elements like tax benefits, the length of the payback period, and if you’ll be eligible for a low annual percentage rate.
Here are all the options currently available to finance the solar panels.
Cash:
Cash is the least expensive option to pay for solar panels and their installation. Because loan payments won’t offset the decreased electricity bills, you’ll see savings more rapidly. Although it is the best option, it is difficult to afford if you face financial issues.
Personal loan:
Personal loans fall under the category of unsecured finance, which means neither your solar panels nor your property is used as security for the loan. The typical range of loan amounts is $1,000 to $100,000, with repayment lengths of two to seven years.
These solar loans have APRs ranging from 6% to 36%, but factors including your credit score, income, and other obligations determine your rate. You may pre-qualify with several lenders for a personal loan to preview possible loan offers without going through a rigorous credit check.
Pros:
- Personal loans have shorter payback durations than house equity and contractor financing, so your net savings on a solar system will become apparent sooner if you utilize them as financing.
- Most personal loans may be financed a few days after approval, which means you might get the money you need as soon as a week after applying. Approval often takes a day or two.
- When a loan has collateral, such as a home or car, the lender may take the collateral if the borrower defaults. Although your credit score may suffer if you default on an unsecured personal loan, there is no chance of losing your house.
Cons:
- Unlike government loans and home equity finance, personal loans offer high-interest rates. Borrowers with vital to exceptional credit (690 or above FICO), high salaries, and little debt receive the lowest rates.
- The tax advantages of a home equity loan or line of credit are unavailable with these loans. There are additional tax benefits for installing solar panels (more on those benefits below), but none for taking out a personal loan.
- An origination fee is imposed by certain lenders; it typically ranges from 1% to 10% of the loan amount and is taken from the loan proceeds. You will earn $18,800 if the origination cost on your $20,000 loan is 6%, for instance.
Home equity financing:
Your house is required as security for home equity loans and lines of credit. To receive the appropriate loan amount, you must also have sufficient equity. With equity finance, you can borrow up to 80% of the value of your property, less any mortgage debt you may have. You may borrow up to $40,000 if your house is worth $300,000 but you owe $200,000 on it.
HELOCs and home equity loans often have APRs in the single digits, which is lower than the majority of personal loans. Generally, the payback period lasts between 15 and 20 years, depending on your selection.
Pros:
- A HELOC often has a variable interest rate, whereas a home equity loan is a second fixed-rate mortgage. The typical rates in both situations range from 4% to 6%, which is lower than the majority of personal loans.
- You may deduct the interest from your taxes if you utilize home equity financing for a home improvement project, including the installation of solar panels.
Cons:
- If you utilize home equity financing, you may be paying for the solar panels for far over a decade, which might negate the electricity bill savings.
- Your credit score will suffer and your house may be taken by the lender if you are unable to repay a home equity loan or line of credit.
FHA 203(k) loan:
You can include the cost of home repair work in your new or refinanced mortgage with an FHA 203(k) loan. Energy-efficient renovations are permitted, but opulent additions like a swimming pool are not permitted with this financing.
A 203(k) credit is a mortgage, so until you refinance, you’ll be required to pay its rate for the whole length of the loan, which ranges from 4% to 6% on average. 15 or 30 years are the usual mortgage lengths.
Pros:
- In comparison to many other mortgage lenders, FHA loans accept credit scores as low as 500. A higher down payment can be necessary, though, if your credit is less good.
- FHA 203(k) loans have lower interest rates than personal loans.
Cons:
- No of how much of a down payment is made, these loans need to have FHA mortgage insurance.
- The FHA requires that construction begin within 30 days of the initial payment and pays the contractor from an escrow account (usually on the closing date).
Contractor financing:
Your system’s installer can offer to assist you in financing it through a third-party lender. Interest rates are often in the single digits, and you may typically borrow the amount that the contractor estimates. From 10 to 25 years are the terms.
Several installation businesses could provide loans with different loan amounts, rates, and repayment conditions.
Pros:
- It may be practical to finance and install the solar panels via the same business because the lender will pay the contractor on time. Just keep in mind the loan installments are due each month.
- In comparison to a home equity loan or line of credit, a solar firm could provide lower rates.
Cons:
- If the term is 20 or 25 years, interest will accumulate even at a modest rate. The total interest on a $20,000 loan for 20 years at a 1.99% APR would be $4,260. Also, the monthly payment will deplete your funds over 20 years.
- With government financing plus home equity, you might not be required to pay an origination fee, which some lenders impose.
- If the contractor does not provide pre-qualification, you will need to go through a rigorous credit check to determine your approval status and the loan offer you are eligible for.
Solar Leases and Power Purchase Agreements
Consider leasing or renting if you want the advantages of solar panels without having to purchase them. In both situations, you may lower your energy cost without having to spend a one-time fee to buy them. You won’t receive any tax advantages, though, and you’ll save less money overall.
Under a solar lease, the solar panels are owned by the solar installation or finance business, and you pay a set monthly fee to utilize them. According to the U.S. Department of Energy, leases typically last 20 to 25 years.
With a lease, you might not save as much because the monthly payment would offset any energy bill reductions. You might need to persuade a buyer to take on the lease if you sell the house before the lease expires, or you might have to pay to have the panels moved to your new house.
With a power purchase agreement or PPA, you pay for the energy that solar panels produce, preferably at a lower cost than the going rate. This is comparable to a lease. The panels are installed and maintained by a developer. With a PPA, your rate might rise by 2% to 5% annually, per SEIA.
Solar Tax Benefits
You can deduct a portion of the system’s cost from your federal income taxes thanks to the federal Investment Tax Credit. According to the Energy Department, the tax credit is 26% for solar panels installed from 2020 to 2022 and 22% for systems built in 2023.
According to the Energy Department, you must meet the following requirements to be eligible for a credit.
- Between January 1, 2006, and December 31, 2023, the system must be deployed.
- Either your primary or secondary house must have the system.
- The solar panels must have been purchased by you. Those with solar leases or power purchase agreements are not eligible; however, if you paid for the system, you are still eligible.
- The system has to be fresh.
Local Solar Rebates:
A reward for installing solar panels may also be provided by your state, county, or municipal. For instance, the utility provider in Austin, Texas, provides homeowners that install solar panels and complete a solar education course with a $2,500 refund.
To find out what’s available in your region, search the Database of State Incentives for Renewables & Efficiency or get in touch with your utility company.
Before the federal tax incentive is applied, money from the state or a municipal government will be deducted. Let’s say that in 2022 you spend $20,000 on a system and receive $2,500 from your public utility. The $2,500 would be deducted from the $20,000, and the $26% tax credit would be applied to the remaining $17,500.
You will have to pay only $12,950 for the system after both incentives.
Conclusion:
As mentioned above, there are multiple options for financing solar panels. Each method has its pros and cons. Buying solar panels with cash is the best option among all the options. It can be difficult, so you can choose the other options. Every option fits a specific situation. You can choose the suitable option after reading the article. Not having cash in your wallet isn’t a big deal now. You just need to make up your mind and financing will be done for sure easily.
