Solar Panel Financing: Everything You Need to Know

Solar panels are very popular these days, and it’s no wonder why. It’s a renewable energy source that can lower your electric bills and add value to your home. However, there is one thing that is keeping homeowners from buying solar panels en masse: sticker shock.

Solar panel systems can have high upfront installation costs, but don’t despair—there are solar panel financing options for homeowners. This guide breaks down some of the top solar financing options and discusses which one might be right for you.

How Much Does Solar Panel Installation Cost?

The cost of typical home solar panel installation is $17,000 to $32,000. Many homeowners don’t have the funds to pay upfront, which is why they explore financing options.

What Are Your Solar Panel Financing Options?

If you can’t pay for your solar panels with cash, look into solar panel finance options before calling a local solar installation pro.

Here, we break down your solar panel financing options: solar panel loans, home equity loans, solar leases or power purchase agreements (PPA), and contractor financing. We discuss each and compare pros and cons so you can find a solar finance plan that lets the sun rise to the occasion of powering your home.

Personal Solar Panel Loans 

A personal solar panel loan works like any other loan. You borrow money to purchase solar panels and pay it back over several years. Loans are often available for zero money down, and rates can range from 6% to 40%.

Secured loans use your home as collateral. This results in better rates, but it poses more risk. Unsecured loans can use the solar panels themselves as collateral or require none at all, so they usually come with higher rates but lower risk.

Generally, you need a credit score of at least 640 to get a solar loan, and it will impact your credit score.

Pros and Cons of Solar Panel Loans 

If you have good credit and need the loan quickly, a personal solar panel loan might be your best option. They are often easy and fast to get. Besides that, they have shorter repayment terms than contractor financing or home equity loans, so you’ll see net savings faster.

However, if your credit isn’t good, you’ll likely end up paying high interest rates and origination fees (a certain percentage of the loan that’s deducted from the loan proceeds). If you take out a secured loan, you may need your home as collateral. You will also miss out on tax benefits that other financing, like home equity loans, can offer.

Home Equity Loan 

Home equity loans and home equity lines of credit (HELOC), like FHA and Fannie Mae loans, are mortgage loans that let you borrow against the value of your home to finance solar panels and other home improvements.You can borrow up to 80% of your home’s value minus your mortgage.

FHA loans require a credit score above 500. This is lower than other lenders, but it means a larger down payment and higher interest. Then again, interest rates on FHA loans are lower than those on most personal loans.

Home equity and FHA loans are fixed-rate second mortgages, and HELOCs are lines of credit with variable interest rates, so ask your financial adviser which is best for you.

Pros and Cons of Home Equity Loans 

Most home equity loans and home equity lines of credit have low annual percentage rates (APR), so you’ll save money over the life of the loan. They also have longer repayment periods that can last almost as long as the solar panels. However, they are a good way to fund larger home-improvement projects, like roof replacements that include solar.

Your home is your collateral for home equity loans and HELOCs. If you’re unable to pay back the loan or line of credit, the lender can take your home. This will also damage your credit score and impact your ability to borrow.

Solar Lease or Power Purchase Agreement  

You can finance a solar system by entering into a Solar Power Purchase Agreement (PPA) or a solar lease. While you won’t own the system, you also won't have to pay the up-front costs of buying and installing solar panels. Instead, you'll pay a monthly fee for the electricity they produce. 

Pros and Cons of Solar Lease or PPA 

Leasing solar panels can lower energy bills and let you join the solar revolution, but it will save you less money over time and you won’t get tax benefits that come with owning panels. Your rate may also increase each year. Most leases last 20 to 25 years. If you sell your home, the buyer must take on the lease or you’ll need to pay to have the panels removed.

Contractor Financing 

Some solar contractors offer in-house financing or financing through a third party. Because financing is individualized, interest rates and repayment terms vary greatly. 

Pros and Cons of Contractor Financing 

Contractor financing is popular because it’s convenient. You’ll apply, be approved, and work with the same company throughout the process. Rates are often low, but repayment terms can be long. This can add up to higher overall cost.

The contractor is in charge of the terms and may charge origination fees and dealer fees. They may also require a hard credit check, which can impact your credit score even if you don’t go through with the financing.

Tip: Before you pursue contractor financing, check personal loan rates. That way, you’ll know whether the contractor’s rate is fair or if you can get a better deal elsewhere.

Understanding Solar Tax Benefits 

Solar tax credits give you back up to 30% of the total cost of solar panels and renewable energy systems. You need to own your home and the solar panel system or renewable energy installation. Your system also needs to meet Energy Star and Internal Revenue Service (IRS) requirements in order for you to claim the tax benefits.

Tax credits are a great way to finance solar panels and other green energy sources. Because of the Inflation Reduction Act of 2022, you can claim 30% credit for systems purchased and installed between 2022 and 2032, 26% credit in 2033, and 22% credit in 2034.

Cash vs. Loan vs. Lease Comparison for Solar

So which option is right for you? It depends on your situation.

Cash: If you can afford it, cash is the best option. You'll save money by not having to pay interest while still enjoying the significant financial benefits of owning solar panels, like lower energy costs and a federal tax credit of up to 30% of the total system cost (not to mention solar panels boost home value).

Solar Lease/PPA: A solar lease or a PPA is perfect for homeowners who want the benefits of solar energy but don't want to buy a solar panel system outright. It's essentially third-party ownership: the owner installs the solar panels on your property and then sells you the electricity they produce for a predetermined amount of time, like 25 years. Unfortunately, you won't benefit from federal tax credits, financial incentives, and rebates since you're not the owner of the system.

Loan: A loan is the best option for homeowners who want the significant federal tax credit and other incentives but don't want to spend that much money up front.

Are Solar Panels Worth It? 

On average, homeowners who install solar panels save about $1,380 per year on energy bills, and about $35,000 over the 25-year warranty period of most solar arrays. Homes in sunny locations with higher energy costs can save even more. You can check your likely savings with the Project Sunroof calculator. Besides that, solar panels add just over $9,000 to the average home’s resale value.

That means solar panels are worth it for most homeowners. But only you can weigh the upfront costs, solar panel finance terms, tax credits, solar panel ROI, and lower utility bills to decide whether solar panels are right for you.