Solar Financing: How It Works

Interested in investing in a solar energy system for your home? It's a smart move that can help you reduce your carbon footprint, gain energy independence, and increase your home’s value. But first comes the issue of paying for the equipment and installation — which tends to cost around $20,000 dollars. If you’re not sure how to go about it, here’s an overview of the ins and outs of solar financing.

How does solar financing work?

Solar financing involves getting a loan, purchasing solar for your home, and repaying the lender over time. But what type of loan, and who provides it? Personal loans, home equity loans, home equity lines of credit, and Federal Housing Administration (FHA) loans can all work — just to name a few. And you can find them from banks, credit unions, alternative lenders, and even solar companies. The key is to find a lender that’ll offer you a loan that’s three things — large enough, affordable, and able to be used on a solar energy system.

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The cost of solar panels

The average cost of an installed residential solar system was about $3.28 per watt in the first quarter of 2023, according to the U.S. Solar Market Insight Report by the Solar Energy Industries Association. With the average U.S. household requiring a 6.62 kilowatt solar panel system, the total average installation cost comes out to $21,713. However, the amount you end up paying will depend on a variety of factors, including:

• Hard costs: All the hardware required for a solar installation, such as the panels, a battery, an inverter, a mounting kit, fasteners, and photovoltaic wire.
• Soft costs: All of the non-hardware expenses required for a solar installation, including labor, permits, and financing fees.
• Home energy requirements: The size of your home and the amount of energy required to power it.
• Location: The hard costs, soft costs, and amount of sun exposure in your area.
• Roof condition: The need for repairs or a roof replacement before installing the system.
• Federal and state tax incentives: Government incentives that can lower your net costs, like the 30% federal solar tax credit.

You can get a better idea of the costs of solar for your particular home by contacting solar providers in your area and requesting quotes.

What solar panel type is right for you?

The right solar panel type for your home will depend on your budget and priorities. Monocrystalline and polycrystalline panels are the two most popular options. Both are composed of silicon solar cells, but monocrystalline panels have a silicon wafer made from a single crystal structure, while polycrystalline panels are made from multiple crystals melted together. Here’s what you should consider:

• Monocrystalline solar panels: These are more difficult to manufacture, which makes them more expensive. However, they’re also more efficient (at 15% to 20%), last longer (around 40 years), and are more heat-tolerant.
• Polycrystalline solar panels: These are a bit cheaper, but they only last around 35 years, offer a lower conversion efficiency of 13% to 16%, and lose more of their efficiency in high temperatures.

Another option to consider are thin-film solar panels.

• Thin-film solar panels: These are made by placing very thin layers of semiconductive, conductive, and protective materials on a panel frame. They offer a more flexible, affordable, and portable option, but are less efficient (7% to 18%).

How much can you save with solar panels?

American households paid an average of $133 per month for electricity in the first three months of 2023, according to data from the U.S. Energy Information Administration. Installing a solar energy system to completely replace that average usage would then offer savings of $1,596 per year. However, you have to buy and install the solar panels first, so it can take some time to break even, and having panels is not a guarantee you’ll never pay another energy bill.

Let’s say your average monthly energy bill is $133 and you buy a $20,000, 6.62 kilowatt solar system in cash. If you receive the 30% federal solar tax credit and it saves you $6,000 on your taxes, it would take about eight years and nine months of saving $133 per month to roughly break even on the remaining $14,000. After that, you’d save on your energy bill every month that you stayed in that house. If you lived there for 40 more years and saved $133 per month, that would amount to $63,840 in savings.

On the other hand, if you finance solar, it can take longer to hit your break-even point due to the loan costs. For example, if you use a 10-year, $20,000 personal loan with a 12% interest rate to finance the system, you’d owe $287 per month until you paid off a total of $34,333. After the tax credit offset of $6,000, it’d take about 18 years of saving $133 per month to break even on the $34,000.

All that said, the higher your average energy bill, the faster you’ll reach the break-even point. Further, inflation and other factors cause the average monthly cost of electricity to increase over time, which can also help you break even sooner.

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Pros and cons of solar financing

Solar financing offers enticing benefits, but there are also a few drawbacks to consider.

Pros

• Go solar: Break down the large cost of a solar energy system and the installation into affordable monthly payments.
• Build equity: Replace energy bills with payments for an energy system you’ll own one day.
• Many options: Choose from a wide range of lenders and loan products.

Cons

• Borrowing costs: Loans come with interest rates and fees that increase the cost of installing solar.
• Further break-even point: The additional costs increase the amount of time it takes to break even and start saving.
• Not all can qualify: It can be difficult to qualify for loans large enough to cover a solar energy system.

How to finance a solar panel

Solar panels can be financed through a variety of different loan types. Here are some of the main options.

Personal loans

Personal loans are fixed installment loans that offer a lump sum upfront that you repay, plus interest and fees, over a set term. Many banks, credit unions, and alternative lenders offer them in amounts ranging from under $1,000 to over $100,000.

In many cases, personal loans are unsecured, so approval is heavily based on your credit and income. You can keep your costs down by shopping around for competitive fixed rates and low (or no) origination fees.

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Home equity

Home equity loans or credit lines are loan products backed by a portion of a homeowner’s equity. Upon approval, a home equity lender allows you to borrow a percentage of that equity, often around 85%. The rates and terms will depend on the loan type you choose:

• A home equity line of credit (HELOC) gives you access to a credit line for a set period, often 10 years. During that time, you only make payments on the interest. When the draw period ends, the total amount due is split into payments over 10 to 20 years. Interest rates are often variable.
• A home equity loan gives you a lump sum upfront, which is repaid through payments over a set term of 5 to 30 years. Interest rates are often fixed.

Home equity loans and HELOCs come with higher interest rates than a first mortgage, but more competitive rates than many unsecured loans. They can be helpful due to their lenient eligibility requirements and high loan amounts. These types of loans are secured by your home, however, so you risk foreclosure if you can’t make payments.

FHA loans

The FHA Solar and Wind Technologies Program allows you to include the full cost of a new solar energy system in an FHA mortgage, whether you’re buying a new home or refinancing your existing one. Once the loan closes, you’ll receive the funds to pay for the system and installation.

Finance with a contractor

Contractors that sell and install solar may offer in-house financing or financing through a lending partner. In this case, they’re incentivized to get you financing because it means another sale for them. However, they may not offer the best rates and terms, so be sure to shop around.

Solar leases/power purchase agreements

Solar leases and power purchase agreements involve a third party essentially renting you their solar panels. They retain ownership of the system but install it on your house. You then typically lock in a rate below your current energy rate for a set term, such as 25 years. While going this route can help you save on your energy bill and leave the maintenance to a third party, you won’t ever own the system or gain energy independence.

Solar financing FAQ

How does solar financing work for residential properties?

You can get a loan and use the funds to invest in a residential solar energy system. The company you hire installs the system, and you repay your lender over time according to the rates and terms of the contract. Solar financing options include personal loans, home equity loans, FHA loans, and more.

Are there any tax incentives available for solar financing?

The federal government is offering homeowners a nonrefundable tax credit equal to 30% of the cost of a solar photovoltaic system installed between 2022 and 2032. Your state may also offer solar tax incentives, so be sure to check. Idaho, for example, offers a residential alternative energy tax deduction that allows for up to $20,000 in income tax deductions over four years.

Can I finance a solar project with bad credit?

Financing a solar project with bad credit can be challenging, but it’s not necessarily impossible. You may be able to find a lender that’s willing to provide a loan large enough to cover the cost, although it’ll likely be on the more expensive side. Loans secured by collateral like a home or solar panels may be easier to get, as they present less risk to lenders.

Is it possible to pay off a solar loan early without penalties?

Many lenders offer loans and don’t charge prepayment penalties. As a result, you can pay your balance off early and save on interest without worrying about any extra fees. Some companies do have penalties, however, so it’s a good idea to check before accepting the loan.

Loan Amounts:

• $1,000 Loan
• $2,000 Loan
• $5,000 Loan
• $10,000 Loan
• $30,000 Loan
• $40,000 Loan
• $45,000 Loan
• $60,000 Loan
• $80,000 Loan
• $100,000 Loan