Solar Loans: What You Need To know

Solar loans are financing options to purchase your solar power system or pay the upfront costs by borrowing a certain amount of money from trusted financial companies and repaying it over a specified time.

Mainly, solar loans are considered the best and most popular financing options compared to solar leases and power purchase agreements (PPAs). This is because they reduce the financial burden on homeowners, lower electricity bills, make users eligible for tax credits, and increase property value. Also, government programs motivate users to prefer solar, thereby reducing carbon footprint as well as the dependence on non-renewable sources.

Before you learn where to get a solar loan and how to choose the best option, you must understand its working and different types. This helps you gain knowledge about the pros and cons, thereby assisting you make effective decisions by selecting between secured and unsecured loans according to your requirements. Most importantly, you will find out if it is possible to claim a solar loan with a low credit score and the chances to sell your home before clearing your loans.

What is a Solar Loan?

Solar loans are similar to the concept of home improvement loans, where the homeowner borrows money from a lender either through the bank or solar company and clears the due back with monthly installments. It helps homeowners prefer solar with a zero-down scheme while funding the whole system.

These are the main purposes of opting for solar loans:

• Less Upfront Costs: You will be able to afford the higher upfront costs of solar energy systems without having the requirement to pay the full amount out of your pocket. This is because solar panels with a price range of $20,000 to $30,000 for a home system can be expensive and difficult for a few individuals to purchase through cash payments.
• Lower interest rates: A better interest rate on your solar loans, relieves you from becoming financially pressured. At the same time, be aware of the fact that lower-interest loans aren’t the most affordable financing option, since few lenders provide lower interest rates, but charge massive fees, which could further raise the total loan cost.
• Tax Benefits: You will be eligible for various incentives such as the federal solar tax credit to save thousands of dollars on your solar system cost.
• Cheaper Financing Method: A few types of solar financing loans can be cheaper, similar to home equity or PACE loans.

How Do Solar Loans Work?

Let’s delve deeper to find out how solar loans work based on these three important aspects:

1. Principal Amount: Here, “principal” means the starting amount of the loan you borrow to finance your complete solar system, which doesn’t include the interest you pay over a certain time on your loan. Based on your lender and the cost of your solar system, you can expect the loan amount in the range of $1,000 to $100,000.

2. Standard Repayment Terms: The financial repayment terms are also referred to as loan term, loan length, or loan contract which explains the duration of the loan you will be making your payments. Typically, solar loans have repayment periods between 15 years to 20 years, but the 25-year duration has become common in recent times.

3. Fees: Similar to other types of loans, there are general fees for solar loans which are comparable to the initiation fee for a homeowner’s loan. These are the two main types of fees that can either be a fixed amount or a specific percentage of your total solar loan amount:

• Dealer Fees: These fees can be as high as 30% of the overall cost of your loan, which depends upon the lender.
• Closing Fees: The closing charges include the administrative fees to take care of your loan provider payments and keeping track of your loan.

The monthly payment structures for solar loans are calculated based on the loan amount, interest rate, and loan term.

Usually, the funds’ disbursement takes place in two stages, such as:

• Initial Stages: A 35% to 60% loan is disbursed, representing the initial payment that covers the deposit and starting the installation process.
• Final Stages: The remaining 40% of the loan disbursement occurs upon the completion of your solar installation.

What Are The Types Of Solar Loans?

Different types of solar loans include Secured, Unsecured, Combo, Amortized, Re-amortized, Zero Down, and PACE (Property Assessed Clean Energy). Out of which the Secured and Unsecured solar loans are the most important ones which will be discussed in detail.

Secured vs. Unsecured Solar Loans

Here is a clear comparison of secured vs. unsecured solar loans you need to know:

Secured solar loans are the security for the money you borrow. In most cases, you need to provide an asset such as your home as collateral for the loan you take. If you take a secured loan and fail to make payments on time, the lender has a legal claim on your property (known as a lien). This allows them to control it until you pay back the entire money you owe to them. Although these loans provide lower interest rates compared to unsecured loans, the risks are high. However, you will be able to qualify for a loan, even if you have a below-average credit score.

These are the four main types of secured solar loans, which include:

1. Home equity loans use your home as a collateral or security.
2. Home equity lines of credit (HELOCs) allow banks to provide you with a line of credit through a checkbook or credit card rather than cash, where you can draw the line of credit over an agreed period.
3. Federal Housing Administration (FHA) Loans are financed by your home, and you will be paying tax-deductible interest.
4. PACE Loans are provided by local governments. You will be paying the loan through fees included in your 10 to 20 years period of property tax bill.

Through an unsecured solar loan, you need not keep any lien on your property. Rather, you can borrow money directly from a lender and make your solar panel installation process smoother. These loans are less risky and have higher interest rates compared to secured loans. Even though the application and approval process is instant, you might not be eligible to claim a loan if your credit score and credit history are low.

Benefits and Drawbacks of Loans for Solar Panels

The advantages and limitations of purchasing solar panels through loans are tabulated below in detail:

S. No	Pros	Cons
1.	Ownership of the panels: You can own your solar panels purchased through solar loans.	Higher overall cost: Even though your interest rate is low, you have to pay costly fees, which could increase the overall loan cost.
2.	Better ROI than leasing: You will get a better return on investment (ROI) than leasing because your ownership will earn more money by selling excess electricity back to the grid.	Not all loans cover everything: A few loans might not cover the costs related to installing solar panel components, such as batteries and inverters.
3.	Lowers Your Electricity Bills: You can minimize or eliminate your monthly electricity costs and accumulate huge savings.	Complicated Loan Qualifications: Not having a qualifying credit score, results in increased interest rates, which makes your investment expensive.
4.	Increased Home Value: Property buyers spend more money on properties with an existing solar system that provides the long-term benefits of saving electricity costs.

How To Get A Solar Loan?

Here is a step-by-step guide you should follow to know how you should get a solar loan:

1. Research About Lenders: Start research by asking your family members or friends who have installed solar panels, they might easily recommend genuine lenders.

A majority of conventional lenders such as banks and credit associations provide solar loans, and if you have a strong continuing relationship with them, you will benefit from a lower interest rate as well. In the modern era, you can easily find numerous online lenders offering solar and personal loans for purchasing and installing solar panel systems for your home.

2. Eligibility: Most often, lenders evaluate your credit score and proof of consistent income to decide if you are eligible for loan approval. Also, remember that the interest rate will be determined based on your credit score. Check that you don’t have any poor credit track record to qualify for beneficial options.

3. Comparing offers: Different lenders have fluctuating levels of risk with one lender offering a lower rate than the other, so it is important to compare two to three estimates of annual percentage rates (APR) from top lenders. Observe which offer suits you the best for saving huge money.

4. Application process: Once you find a trustworthy lender, you should provide the necessary documents such as income proof, credit history, and identity proof while filling out the application form. You might be required to fill out additional information after the lender reviews your application.

5. Finalizing the loan: Before signing, read the loan agreements carefully, and once the loan is finalized, the lender will transfer the funds to the solar installation company so that you can proceed with solar installation panels.

Solar Loans vs Solar Leases vs Power Purchase Agreements (PPAs)

Let’s compare solar loans with other financing options such as solar leases and Power Purchase Agreements (PPAs), based on the important factors explained below in detail:

1. Solar Loans:

• Ownership: You will completely own the solar system once you clear the loan amount,
• Cost: If you qualify for a lower interest rate, your monthly payments will be lower than leases and PPAs.
• ROI: The ROI is greater for solar loans since you own the system once you clear the debt to save electricity bills and increase home value.
• Incentives: You will be eligible for state or local rebates as well as a federal tax credit and receive a credit worth 30% of the overall system cost.

2. Solar Leases:

• Ownership: You won’t get access to ownership since solar companies own the system, and you will be paying monthly fees to use the electricity generated by the system.
• Cost: Since leases have no upfront cost, the monthly payments can be higher compared to loans.
• ROI: The ROI is lower for solar leases since you don’t own the system.
• Incentives: The solar company retains the benefits of claiming federal solar tax or other incentives than a homeowner.

3. Power Purchase Agreements (PPAs):

• Ownership: Homeowners accept purchasing electricity generated by the solar panel system at a fixed rate, which is lower than the local utility costs. However, you won’t be able to own solar panels, which is a limitation to earning profits linked with solar installations.
• Cost: The rate is lower than the utility rate, but includes escalator charges of up to 4% per year.
• ROI: Although you can save electricity bills amount, ROI is lower than loans and cash payments.
• Incentives: Solar panel owners rather than homeowners will gain tax and incentives benefits and sell excess electricity back to the grid to earn huge profits.

Where Can You Get a Solar Loan?

These are the different reputable sources where you can get solar loans in the US in 2024:

1. SoFi: One of the leading online platforms to offer unsecured fixed-rate personal loans, SoFi operates in 50 states across the U.S. to give out loan amounts from $5,000 to $100,000. You can select the loan repayment terms from two years to seven years. But, you need to have at least $45,000 annual income and a credit score of 650.

2. LightStream: You can get highly affordable loans on LightStream, which is a division of SunTrust Bank, from $5,000 to $100,000. Also, there aren’t any origination, late payment, or prepayment charges from the lender. Additionally, you will get a discount rate of 0.50% for users enrolling in autopay services.

3. LendingPoint: If you have a credit score of 600 or more, and aren’t residing in Nevada or West Virginia, the LendingPoint is one of the best sources you should consider. Although you might have to pay a 10% origination fee, you can get loans for amounts ranging between $1,000 – $36,500 for longer terms ranging from 24 months to 72 months. As a borrower, you will get sufficient time and freedom to repay the loans.

4. Upgrade: If you’re searching for loan providers who can provide amounts in a small range from $1,000 to $50,000, Upgrade is another promising online platform to consider. Compared to other providers, Upgrade allows co-borrowers to increase their loan approval despite having low credit scores.

5. Discover: You can get personal solar financing loans starting from $2,500 to $40,000 from Discover, where you need to meet the eligibility criteria of fulfilling a credit score of 660. However, the flexible repayment tenure of 3–7 years boosts the credit score.

How to Choose the Best Solar Loan?

You need to consider these factors while choosing the best solar loans to gain long-term benefits:

1. Lender Reputation: To evaluate the lender’s reputation and quality of service provided, you need to search for reviews and ratings from other customers. Also, check that the lender holds accreditation from proper financial institutions and has the best ranking in the industry.

2. Comparing Interest Rates: You need to compare the loan interest rates from various lenders and choose the best company that asks for minimum fees or no fees at all. Based on your preferences, you should select a fixed interest rate (remains consistent throughout the loan’s duration) or variable rate (fluctuates depending on the market value).

3. Loan Terms: Generally, loan repayment tenure affects your monthly payments. Few lenders offer longer repayment tenure, particularly for home development projects. But, you need to be aware of the fact that longer terms have lower monthly payments, but have higher interest costs. The best option is to find reputable lenders who can offer flexible repayment options, such as flexibility to make additional payments without any penalties so that you can clear loans faster and save interest amount.

4. Additional Fees: Few lenders might pose origination fees ranging from 1% to 10% of the loan amount, which might be deducted before the funds transfer. As a result, you might receive a reduced amount than the initially agreed ones. Additionally, you need to check if the lender has charged penalties for either paying off the loan too early or too late, as well as the annual fees. It is important to avoid loans that have prepayment penalties so that you can maintain flexibility.

Am I eligible to qualify for a solar loan despite having a low credit score?

Yes, You can qualify for solar loans with a low credit score, but you should be ready to face severe challenges. This is because lenders and financial companies will consider providing loans as a riskier move if you don’t have a good credit score. As a result, you might be charged with higher interest rates to apply for a loan.

Typically, you might require a minimum credit score (known as FICO score) of 650 to 719 to meet the eligibility criteria, but few lenders will accept provide loans if your score is 600. However, it is advisable to maintain a credit score of above 720 to qualify for the best reasonable interest rates.

These are the main factors that impact your credit score:

• Payment History: Make sure to pay your bills on time by setting the remainder for the payment date. If you face any issues related to paying credit cards or other types of bills, it is advised to contact your finance company or bank immediately so that you will get instant and effective solutions.
• Credit Usage: The percentage of credit available could have a direct effect on your loan. By maintaining more substantial credit balances, you will be able to clear your debts easily to increase your credit score. It is important to plan your budget and set aside additional funds to clear your outstanding debts to increase your credit score by ensuring to have a debt-to-income ratio, which is the main factor lenders evaluate while approving the loan.
• Credit History: Maintain a decent track record of using your credits and making payments on time. If you’re not having a credit card, you should opt for secured credit cards, which is an advisable option to fund your card with a deposit.

What happens if I sell my home before my solar loan is paid off?

If you sell your home before clearing the solar loans, it would be tough to dismantle and relocate the solar panel system to a new location or leave it on your roof after investing a lot of money and effort. However, there are a few options to be considered such as paying off the loans, transferring the loans, or opting for lease agreements and power purchase agreements (PPAs) explained below in detail:

1. Paying off the loan: This is one of the simplest options where you have to pay the remaining balance as the closing amount before listing your property for sale. As a result, there wouldn’t be any lien holders or obstacles in selling your property.

2. Transferring the Loans: At times, few lenders permit new homeowners to take over the solar loan from the previous owner. However, the new buyer should qualify for the eligibility criteria to handle the loan financially, which might be a challenging task. As a homeowner, you should plan for the transfer charges or fees while finalizing the selling price of your property.

3. Solar Lease: If you’ve purchased solar panels through lease rather than paying ready cash or loans, you can transfer the lease to a new homebuyer, who should agree to the terms and conditions regarding making payments.

4. Power Purchase Agreements (PPAs): If you’ve acquired solar panels through PPAs, the new homeowner should accept the agreement, which states that power generated by solar panels will be purchased at a predetermined price range.

Are there any government programs that help with solar loans?

Yes, There are several government programs and incentives that help with solar loans, of which the main ones are listed below:

1. Solar Investment Tax Credit (ITC) allows you to claim 30% installation cost of your solar panel system.
2. Lower Income Home Energy Assistance Programs (LIHEAP) proposed by the U.S. Department of Health and Human Services (HHS) help families by supporting energy costs invested for solar energy projects.
3. The DOE’s Weatherization Assistance Program (WAP) offered by the U.S. Department of Energy (DOE) offers funds to states to assist lesser-income individuals in minimizing their energy costs by maximizing the energy efficiency of their homes.
4. FHA 203 (k) Loan Program under the U.S. Department of Housing and Urban Development (HUD) assists you in making payments for buying a home, planning for solar panel installation, and other renovations or improvements.