How to assess a solar loan


How to assess a solar loan


If you're a homeowner seeking the benefits of solar, it's important to understand what types of solar loans are available. With more lenders and loan options to choose from, it can be difficult to sort the good from the bad – especially if you don’t know what you’re looking for.

Understanding the main components of a solar loan and knowing how to evaluate your options is incredibly important. Let’s dive into what you should consider when assessing a solar loan, questions to ask yourself before taking out a solar loan, and why finding the right solar loan is crucial.

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    6 factors to consider when assessing a solar loan

    When searching for a solar loan, there are many aspects that you’ll need to consider and assess to ensure you get the best loan possible. Knowing what these factors are and how they can impact your loan can play a big part in avoiding misleading and predatory loan options.

    The following loan features will have the biggest impact on your finances and should be your main concern.

    1. Total payback value

    The first factor that you must look at when considering a loan offer is the total loan payback value. This is the total amount you’ll be required to pay throughout the entirety of the loan. The total payback value takes into consideration the principal amount, total interest, and other fees.

    This will give you a great indication as to how the loan will affect you financially and will provide you with a simple dollar amount answer. With that answer, you can also easily compare loans and figure out whether undertaking the loan is worth it.

    2. Interest rate

    The interest rate is the amount a lender charges you and is seen as a percentage of the principal amount borrowed. Your interest rate can depend on several factors, including your creditworthiness, loan terms, and the lender. But, for the majority of solar loans, your interest rate will range between 3% and 8.5%.

    The interest rate that accompanies your solar loan can drastically change your total payback value. Be sure to compare interest rates between multiple lenders, and remember that the lowest interest rate doesn't always mean it's the best loan option.

    3. Loan term

    The loan term refers to the length of time you’re given to repay your loan. Solar loans are offered in a wide range of different loan terms with some being as short as three years and some as long as 30 years.

    Why does your loan term matter?

    With different loan terms, you will have different monthly payments. For example, short-term loans will require much larger monthly payments. That said, the longer your loan term, the more interest you will pay over time.

    Be sure to evaluate your options and select a loan term that you can meet the monthly repayments on – and doesn’t negatively impact your finances.

    4. Loan fees

    Other than the interest rate on your solar loan, there are also several fees that lenders may be applying. These fees can include origination fees, application fees, late payment fees, prepayment penalties, and many more.

    These fees can have a huge impact on your loan and can cost you thousands. For example, some lenders charge an origination fee as high as 30% of your loan amount. Be sure to read the fine print to see if your loan is subject to any concerning fees.

    If reading the fine print doesn't clear things up for you, then you should contact the lender for clarification before you take out the solar loan.

    5. Loan type

    An important aspect of your loan that you should decide on early in your borrowing process is the type of loan to take out. The two solar loan types that you have to choose from are secured and unsecured loans.

    If you're looking at a secured solar loan, then you should expect lower interest rates and larger loan amounts. Keep in mind, though, that you will need to sign over collateral to financially back the solar loan.

    For an unsecured loan, you won't need to sign over any collateral. However, you may be exposed to higher interest rates, smaller borrowing power, and strict eligibility requirements.

    Whether you go with a secured or unsecured solar loan will make a huge difference to your loan arrangements and your finances.

    6. Lender’s trustworthiness and credibility

    With not all lenders being as trustworthy and reliable as you'd hope, any borrower needs to do their research on the lender before entering into a loan. This means looking at more than just the financial institution's interest rates and loan terms. One way to evaluate a lender without even looking at their loan offerings is by finding out about their reputation and customer reviews.

    The easiest place to start is with a simple online search to take a look at reviews and the company's digital presence. This will allow you to see what other borrowers have experienced with the lender and create a picture of what people think about the financial institution. Looking at online reviews will also often uncover hidden fees that may be associated with the loan.

    You can then take it a step further by searching the lender on sites such as the Better Business Bureau (BBB) and the Consumer Finance Protection Bureau (CFPB). Here, you'll see customer reviews and a company's reputation grading.

    Before starting any loan arrangement, make sure you're completely comfortable with the lender and you're confident in their legitimacy and reputation.

    Questions to ask yourself before taking out a solar loan

    When you’re beginning the process of seeking and selecting a solar loan, there are several questions that you should ask yourself to ensure you’re making the right choice.

    Here’s what you should consider when choosing a solar loan.

    Does the loan option meet my needs?

    Before entering into a loan, make sure that the amount will meet all of your financial needs. This mostly refers to the loan amount and its ability to cover all of your solar expenses.

    With the average cost of a residential solar panel installation ranging between $18,000 and $20,000 (minus the federal solar tax credit), your loan should be around these figures.

    What kind of loan terms and features am I looking for?

    You should have a clear understanding of the type of loan you’re looking at borrowing. This involves understanding what your options are and what loans you will be eligible for.

    Depending on your eligibility, there are several different loan terms and features that may affect your borrowing experience.

    Do I have a good enough credit score?

    Your credit score is a crucial part of most lenders' risk assessment and is based on several factors including total levels of debt and repayment history.

    Knowing your credit score and credit history can give you a great indication of what solar loans you may be eligible for. Reviewing your credit report before applying for a solar loan will also allow you to make any necessary corrections or adjustments.

    Can I afford the repayments and fees?

    Make sure that with whatever loan you’re thinking of borrowing, you’re confident in your ability to meet the repayments and accompanying fees.

    You should also consider how taking out a solar loan will impact your finances and how you may need to change your spending habits.

    How quickly can I pay it off?

    With most solar loan options, you’ll be required to pay back the loan through monthly installments. The size of these repayments will largely depend on the loan term length you select. The shorter the loan term, the larger your monthly repayments will be.

    So, to figure out how quickly you can pay off the loan, you should look through your finances and work out a payment amount you can sustain.

    Why is finding the right solar loan so important?

    Many negative repercussions can come from selecting a poor solar loan option. The first is that it can result in you getting too deeply into debt.

    A bad loan option could also have a major impact on your ability to borrow in the future. This is due to factors such as high-interest rates and costly ongoing fees, making your repayments unmanageable. This will often lead to late payments and even defaulting on the loan.

    That's why it's so important to take the extra time to properly assess your solar loan options to ensure you don't get stuck with any troublesome loan arrangements.

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     - Author of Solar Reviews

    Cameron Bates

    Blog Author

    Cameron is a business analyst and content specialist at SolarReviews.

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