Solar Power Financing: What's the Best Approach?


Solar power can save you money in the long run, but you still need to pay to get it set up. Here's how you can do that.

Smiling woman handing financial papers to banker.

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Solar power can save you a fortune on your electric bill, and you can also help the earth by generating your energy from the sun instead of relying on the power company. Unfortunately, installing solar panels can cost upwards of $20,000, depending on the size of your solar-power system -- and coming up with this money isn’t always easy.

The good news is, there are a number of different options to pay for a solar-power system for your home -- find out which is the best one for you. 

Leasing panels

In most parts of the country, solar panels can be leased. This means you don’t own the panels that go on your home. Instead, a solar leasing company installs the panels on your roof to generate electricity and you pay a monthly fee.

Solar leases are often offered with $0 up-front cost, and the leasing company promises you’ll still save money because the monthly cost of the lease will be less than what you were previously paying for power.

But your savings are much more limited with a solar lease, because you have to pay for the lease the entire time the panels produce electricity for you. If you opt for a loan instead, you’ll usually have it paid off in under a decade -- depending on the terms of your loan -- while the panels can continue generating electricity for you for 20 years or more.

With solar leasing, you also give up the opportunity to claim federal or state tax credits or other financial incentives for installing solar -- which is a big downside. And if you want to move, you’re going to have to find a buyer for your home who’s willing to take over the solar lease payments.

Solar loans

Solar loans are another solution. These are offered by lenders that market solar loans. Your solar installer may have a relationship with a solar loan company and may also help you obtain this type of financing.

Solar loans can be a better option than leasing because you should be able to pay off the loan while your panels are still working for you -- so you’ll have years of energy savings with no solar payments.  Plus, you should be eligible to claim tax credits and incentives even if you take out a solar loan.

Unfortunately, because a limited number of lenders offer solar loans, you don’t have as many options to shop around for financing as you would if you simply took out a personal loan and used the money to install solar.

Plus, if you get the loan through your solar installer, you’ll lose out on any discounts the installer offers for paying cash. These types of discounts are very common (my husband and I saved several hundred dollars installing our solar power system because we paid cash).

Personal loans

Personal loans are a great choice for solar power financing and are often the best choice for many homeowners.

Personal loans are a great way to finance a solar system because so many different lenders offer personal loans. You can shop around to find the best banks, credit unions, and online lenders. You can use personal loan funds for anything you want, including solar power -- and by not restricting yourself to solar loans you may be able to qualify for a loan with a better rate and better terms.

In many cases, personal loan lenders offer flexibility in repayment terms. You can choose lenders with three to five year repayment terms, or with a longer repayment timeline so you can pay back the loan over a decade or so. But, when your loan is paid off, you’ll continue to get the benefit of the energy savings without owing any money, unlike with a solar lease.

If you get a personal loan independent of your solar installer, once the money is deposited into your bank account, you can also use it to pay cash for your installation -- thus qualifying for a cash discount if one is offered. And, you can get any tax credits or incentives available for solar installations.

Home equity loans

Home equity loans are another solution to finance the cost of a solar power installation. This type of loan has some big benefits that could make it the right choice for some homeowners.

Home equity loans often have a lower interest rate than personal loans because these loans are secured. This means your loan could be more affordable, since you’ll pay less in interest. You can also repay the loan over a long time, so payments are affordable. Plus, since you get the home equity loan funds deposited into your bank account, you can again qualify for any available cash discounts.

If you take a home equity loan and use the proceeds to improve your primary home that’s acting as collateral for the loan, you can also potentially take a tax deduction for home equity loan interest. However, you have to itemize to take this deduction, so unless you have enough itemized deductions to exceed the standard deduction, you won’t be able to take advantage of this tax savings.

The big downside is, when you tap into your home equity, you put your house at risk. If you can’t pay back the loan, the bank could foreclose. If you end up owing more than the home is worth, you could also have a hard time selling your home if you can’t bring cash to the table to pay the remaining loan balance.

Home equity loans also aren’t an option for everyone, as you need equity in your home to qualify.

What’s the right choice for you?

Ultimately, the best way to borrow depends on your situation. Personal loans are often a good choice, but you can also consider home equity loans if you qualify and are willing to take on the risk. Just be sure you fully understand the terms of any loan you take out and that you don’t borrow more than you need so you can get your debt paid off ASAP and start reaping the financial benefits of a paid-for solar-power system.

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