Beware origination fees & other hidden fees in solar loans
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When searching for a solar financing option, it is common for people to simply look for the loan with the lowest interest rate and smallest down payment. While in theory, this is a valid approach, in practice you could be falling for a deal that is too good to be true.
That's because some financing options appear to have easy terms but actually contain nasty upfront and ongoing fees.
These hidden fees can have a major impact on your monthly repayments - and cost you thousands over the course of the loan. This is why it is vital to understand what these fees are, and how much they will cost you.
A hidden fee is any unexpected fee that borrowers are charged when taking out a solar loan. The reason they’re called hidden fees is that you’re often unaware of these fees until after they have been charged or, in some cases, you never even realize you’re paying them.
While many hidden fees are relatively small, if charged regularly the accumulated amount can make a noticeable impact on your account. Some hidden fees can have a drastic effect on your loan and can spell trouble for your finances.
Origination fees, otherwise known as dealer fees, are perhaps the most dangerous hidden fee you will come across when searching for a solar loan.
The origination fee is used by loan providers to cover processing expenses and is typically charged as a percentage of your total amount borrowed. However, while origination fees will usually range between 1% and 5% for conventional loans, some solar loan companies will charge an origination fee of up to 30%.
What makes this a sneaky and often predatory charge is that many borrowers are unaware of how much they will be charged until after the loan has been approved.
To put this into perspective: a $20,000 solar loan could see you paying an extra $6,000 as an origination fee. By comparison, a traditional $20,000 bank loan would only charge an origination fee of $200-$1,000.
Origination fees are used by lenders to reduce their risk and increase profits. By including origination fees with their loan options, they’re also able to advertise a lower interest rate without financially suffering. Solar financing companies are then able to mislead borrowers into entering a loan that isn't as impressive as it first appeared.
For example, if you take out a $20,000, five-year solar loan advertised as ‘zero interest’ - but it comes with an origination fee of 30% - you end up repaying more than a loan with a 10% interest rate.
With some solar loan providers having such large origination fees, make sure to read the fine print of any loan application. If you’re seeking more transparency, then a more traditional bank loan might be a better option.
A high percentage of lenders will attach an application fee with any loan you apply for, whether that be a secured or unsecured loan. This fee is usually charged by loan providers even if your application is unsuccessful.
The application fee for personal loans will usually be a small, flat fee ranging between $20 and $50 depending on the provider. However, some lenders will charge hundreds of dollars as an application fee, something you should watch out for.
This kind of fee may be frustrating, but as long it is charged at standard rates it is understandable. It covers lenders for administrative costs incurred and the fees for getting a copy of your credit report.
Prepayment fees aren’t as common as other fees on this list but can still pop up with some solar loan options.
A prepayment fee is applied to some loans when you pay the loan off before the end of the term. So, if you were to take out a 10-year loan but pay it off in 5 years, some solar loan providers could charge you a prepayment penalty.
The reason prepayment penalties are applied is to recoup profits that the lender loses from a loan term that is cut short.
Prepayment penalties can range anywhere from 1% to 5% of your original loan amount. So, if you're considering early repayment of your loan, be sure to double-check your loan details.
A late payment fee is charged if you fail to make a repayment on time. Late payment fees can be found on almost every solar loan, no matter the lender.
In most cases, a late payment fee will be a flat amount on each missed repayment or a small percentage of your repayment amount. The flat fee will usually range between $25 to $50 and the percentage-based charge should be no more than 5% of your repayment amount.
The main reason that lenders charge a late payment fee is to encourage borrowers to make repayments on time.
An annual fee, also known as an administration fee or loan service fee, is a charge that is often tagged onto your total loan amount at the end of every year. This fee is used to cover the costs that the lender incurs from managing your loan throughout the year.
In most cases, this fee will come as a flat fee that is incurred once per year. The amount will vary depending on the lender but in most cases will not exceed $100 per year.
The origination fee stands out as the worst hidden fee associated with solar loans and one you should actively avoid.
Some of the other fees we’ve discussed are more typical and are no cause for alarm. For instance, it’s unlikely that you’ll find any loan that doesn’t charge a late payment penalty for missed repayments.
Follow these tips to avoid paying more than you bargained for: