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How Do Solar Loans Work? A Complete Guide

Last updated 04/30/2024 by

Jessica Walrack
A new solar installation was completed every 84 seconds in 2016. (Source)
Thinking of installing solar panels? You’re not alone. In 2016, a new solar installation was completed in the U.S. every 84 seconds, according to the Solar Energies Industry Association (SEIA)– it was the largest year yet. But how do solar loans work?
Over the past decade, the cost to install solar energy systems has dropped by 60%, while solar installations have had a compound annual growth rate of 60%. With increased affordability, long-term benefits and incentives, and tax breaks on the table, it’s an investment that makes sense.
However, there’s an upfront cost to consider. One way to make the move to solar is to obtain a solar loan to purchase the system. How do they work? Let’s investigate.

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How solar loans work

A solar loan is a loan used to purchase a solar panel system. It’s an alternative to leasing solar panels or buying them in full, up front. You choose the loan type, find a lender with the best offer, and finance the entire cost of your system. As a result, you own your solar system and are qualified to get rebates, tax credits, and other incentives.
Peter Liepmann is a homeowner who used a solar loan to purchase a 4kW solar energy system for $16,000. A 4kW system is a popular option for residential solar installations. He says it’s been 18 months since he made the purchase, and he’s saved $6,000 on his energy bill and received the 30% tax credit for $4,800 leaving his net cost at $5,000.
He says, “The bottom line is, if you buy 4kW system, and you’re going to stay in your house more than a year, it pays off. If you’re staying longer, it pays off more.”
One of the primary benefits of using a loan to purchase solar is that it’s an asset that generates savings. You’ll immediately lower your electricity bill and, often, the monthly loan payments will be less than your monthly electricity bill was. As time goes on and electricity rates go up, you’ll save more.
There are various types of loans you can use to finance solar. Here are the options to consider.

Personal unsecured loans

A personal unsecured loan is a loan that doesn’t require any deposit or security. There are many online lenders that make the application and approval process fast and easy. Being that the loan is unsecured, the risk is higher for lenders, which can translate into a higher interest rate for you.
However, if your credit is good, you may be able to land favorable terms, while at the same time avoiding a loan secured by your home.
Find out what you qualify for without hurting your credit
Compare the pros and cons to make a better decision.
  • Convenient application process- it’s easier than secured loans, where lenders have to appraise and verify your assets
  • Can qualify for good interest rates with good credit
  • May get a higher interest rate with subprime credit
  • Interest is not tax-deductible

Home equity financing

Home equity financing provides you with funds secured by the equity you have in your home. If you take this route, your house will be appraised and your equity will be the difference between the appraisal amount and what you owe.
You can then perform a cash-out refinance or take out a loan or credit line for a percentage of the equity you have available, typically in the ballpark of 85%. Here’s an example.
  • House value: $350,000
  • Amount owed on first mortgage: $250,000
  • Equity: $100,000
  • Loan-to-value available 85%: $85,000
In this scenario, you could cash out $85,000 through a refinance or take out a loan or line of credit for this amount.
Home equity financing is secured, which lowers the risk for the lender and results in a low-interest rate for the borrower. Interest paid on secured loans is also tax-deductible. The risk involved here is that, if you don’t keep up with your payments, the bank has the option to foreclose on your home to recoup their money.
The processing time can also take longer than an unsecured loan, as the lender needs to approve your asset and it’s value.
Compare the pros and cons to make a better decision.
  • Low interest rates
  • Tax-deductible interest
  • Favorable terms
  • Secured by your house- If you default the bank has the option to foreclose your home
  • Loan approval process can be time-consuming and tedious

FHA, Title 1 home improvement loan

The U.S. Department of Housing and Urban Development (HUD) has a program for home and property improvement loans. They insure Title 1 loans, which are then offered by approved intermediary lenders. Loans over $7,500 are secured by a mortgage or deed on the property, while those under that amount are usually unsecured.
Compare the pros and cons to make a better decision.
  • Low interest rates
  • Interest is tax deductible if loan is secured
  • Guaranteed by the government which lowers risk for lenders
  • Secured by your house-If you default, the lender will have a lien against your home, which will be paid when and if you sell your home
  • Application and processing can be a tedious process if your house is being used to secure the loan

Fannie Mae HomeStyle Energy Mortgage

This is a mortgage loan similar to a cash-out refinance, which is offered by all Fannie Mae-approved lenders. It helps borrowers increase their energy efficiency and reduce their utility costs by allowing borrowers to finance energy efficient upgrades, like solar panels, when refinancing or purchasing a home.
The program allows you to borrow up to 95% of your appraised property value, and you can take out up to 15% for energy upgrades. Here’s an example.
  • “as-completed” appraised property value: $300,000
  • 95% Loan-to-value: $285,000
  • 15% for your energy efficient upgrades: $42,750
In this scenario, you could take out $42,750 for your solar energy system.
Compare the pros and cons to make a better decision.
  • You only have one loan to manage (instead of two, as is the case with home equity financing)
  • Mortgage amount is based on property value after improvements
  • High loan-to-value ratio of 95%
  • Low interest rates
  • 15% of your home’s post-improvement value may not be enough
  • Itemized report that details how the money will be used is required
  • Closing costs may be charged
  • Loan is secured by your home, so, if you default, it may be foreclosed

Solar incentives, tax breaks, and rebates

Investment tax credit for solar

This tax credit has been created by the SEIA to drive the growth in the solar market. It’s also known as the federal tax credit and offers a 30% tax credit on solar energy systems with no upper limit.
This credit is available through 2019. In 2020, the credit will drop to 26%, and in 2021 it will drop again to 22%, before expiring in 2022, according to Energy Star.

State, municipality and utility incentives

Aside from the federal tax credit, each state varies in the tax credits, incentives, and rebates it offers. You’ll also find varying programs from municipalities, utility companies, and other organizations.

Find the right solar loan for you today

If you’ve been thinking about investing in solar, now is a good time while the 30% federal tax credit is still available. By opting for a solar loan, you can begin putting your monthly payments toward your energy system, instead of staying on the hamster wheel (paying electricity bills).
Then, eventually, your system will be paid off, and you’ll own a renewable energy source in full. Different loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you, and don’t forget to shop around to find out which lenders offer you the most favorable terms.

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Jessica Walrack

Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar,, Commonbond, Bankrate, NextAdvisor, Guardian, and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.

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