Solar loans: Everything you need to know

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Updated

Solar loans: Everything you need to know

 

If you’d like to get solar panels for your home, you have a few options on how to pay for them:

  • Cash payment in full
  • Solar loans
  • Leasing/PPA’s

If you want the best savings, we recommend paying for your system in cash. However, if you don’t have thousands of dollars saved up to buy solar panels, financing with a solar loan is usually the next best option. 

Loans can be a great way to pay for solar panels because they typically come with no upfront cost, and monthly loan payments are often lower than your pre-solar electricity bill. But, you have to be careful and choose the right loan provider.

Here are some general guidelines you should know about solar loans:

  • Solar loans can be a great way to pay for solar, because the loan payments are initially offset by your monthly energy bill savings.
  • Solar loans can come from traditional banks and credit unions, or solar specific lenders like Mosaic, Dividend Financial, or GoodLeap.
  • Loans with low interest (around 4 and 5%) rates come with dealer fees, which will be added to the principal of your loan. Loans without dealer fees will come with higher interest rates (around 8 percent).
  • Many solar loan providers require you to either pay the full amount of the federal solar tax credit toward your loan within 18-24 months, or face higher monthly payments.
  • If you have a remaining balance on a solar loan and you want to sell your house, it is common practice to pay off the balance of the loan, either before the sale or in the escrow process.
  • Paying off the loan early is a good reason to choose a loan with no dealer fee, because the remaining balance will be lower.

As you can imagine, as a topic that has to do with long-term financial planning, choosing a solar loan can be very complicated, and requires the advice of professionals like your accountant and financial advisor.

We are not professional financial/tax advisors, but we are experts in home solar, and we can offer a bit more detail into how solar loans work. Read on for our full guide to solar loan providers, how solar loans work, common questions, and loan alternatives.

See how much a solar loan can save you

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Key takeaways

  • Loans can be a great way to pay for a solar installation, with lower monthly payments than the electric bill savings provided by the solar installation, but homeowners need to understand several key concepts when choosing a solar loan.
  • Solar loans often come with dealer fees (aka finance charges) of between 20 and 40% of the cash price to install the solar system, which are passed along to the buyer and add cost to the principal of the loan.
  • Many solar loans require borrowers to pay back as much as 30% of the loan amount within 18 months of the origination date, an amount which is tied to the value of the federal solar tax credit.
  • The most popular lenders in the solar industry are Mosaic, Sunlight Financial, Goodleap, Dividend Financial, and the Energy Loan Network.
  • When considering a solar loan, it is important to be careful, compare quotes from multiple providers, and consult trusted financial advisors before making a final decision.

On this page

    Top solar panel loan providers in 2024

    According to the results from our Solar Industry survey, here are some of the most popular loan providers used by installers:

    • Mosaic
    • Sunlight Financial
    • Goodleap
    • Dividend Financial
    • Energy Loan Network
    • Clean Energy Credit Union

    The Survey data also gave us a picture of the average loan rates and terms offered by the top lenders in the industry as of spring 2023. Note that this data is historical and does not necessarily reflect current rates.

    Here’s a rundown of some of the data we gathered about the solar loans offered by these companies:

    Provider Average interest rates Term length
    Mosaic 5.68% 20 years
    Sunlight Financial 5.23% 20 years
    GoodLeap 3.95% 25 years
    Dividend Finance 5.61% 20 years
    Energy Loan Network 5.24% 15 years
    Clean Energy Credit Union 7.00% 15 years
    Lightstream Financial 7.99% - 21.24% 2 - 12 years

    In addition to the providers listed above, people in certain states can access solar panel financing from local credit unions like UMassFive and Puget Sound CCU and state programs like MichiganSaves.

    How solar loans work

    Solar loans aren't as simple as other kinds of loans, so there's a lot to learn.

    The key features and concepts to understand about solar loans include:

    • Secured vs. unsecured
    • Dealer fee (aka finance charge)
    • Interest rate
    • Term (length)
    • Balloon payments
    • Monthly payments

    Let’s take a closer look at each of these features:

    Secured vs. unsecured loans

    Let’s start by saying that solar-specific loans are generally unsecured, meaning they are not backed by an asset (such as your home) as collateral. This differs from car loans, home equity loans, and HELOCs (home equity lines of credit).

    A secured loan, on the other hand, is backed by a collateral asset. In most cases, secured loans will be backed by either your home or the solar panel equipment itself. Be careful with a secured loan – if you don’t pay it off in time, you can kiss your solar system, or even your house, goodbye!

    Unsure how to choose between secured and unsecured loans for your solar project? Check out the pros and cons listed below:

    Secured loans Unsecured loans

    Pros:

    • Lower interest rates
    • Relaxed eligibility requirements
    • Larger loan amounts
    • Helps to build your credit score

    Pros

    • No risk of losing collateral
    • Better flexibility
    • Faster application and approval process

    Cons

    • Risky for your credit score
    • Borrowers risk losing their collateral
    • Can come with restrictions on loan usage

    Cons

    • Strict eligibility criteria
    • Higher interest rates
    • Can come with hidden fees
    • Smaller loan amounts

    Dealer fees

    Let’s be real for a second – when banks lend money, they want to be reasonably certain they’ll get that money back.

    Lending money requires accepting some risk that the loan won’t be paid in full, and the banks take care of that risk by requiring dealers (i.e., solar installers) to pay a fee to initiate the loan. That fee is passed directly on to the buyer (i.e., the homeowner) in a solar installation contract and becomes part of the principal of the loan.

    To determine the size of the dealer fee, always ask for a cash quote from the installer alongside a quote with financing included. The difference between the cash price and the principal of the loan will reveal the size of the dealer fee. Each solar company will have its own dealer fees based on their agreements with their lending partners.

    The dealer fee is also sometimes called a “finance charge” or “buy down” because it is designed to keep the interest rate low for the life of the loan.

    Be careful: Dealer fees can add thousands of dollars to the cost of a solar system. Average dealer fees for solar loans in 2023 are around 25%, but we’ve seen them as high as 40-50%. These fees can reduce your return on investment in a solar purchase. Be sure to consult with a trusted financial advisor before choosing a solar loan with a dealer fee.

    Interest rates

    In 2023, interest rates on unsecured solar loans with dealer fees average between 2.99% and 5.99% APR. Interest rates for solar loans are typically lower than other financing options, such as personal loans, home improvement loans, and credit cards.

    Financing companies keep the Annual Percentage Rate (APR) on their loans low by increasing the dealer fee. That guarantees that the bank makes a good return on the loan while keeping loan payments relatively low fixed rates for homeowners.

    Secured solar loan providers like the credit unions mentioned above often don’t require a dealer fee but have higher APRs. For example, Clean Energy Credit Union offers solar loans with APRs of between 7.49% and 8.24% (as of mid-2023).

    Solar loan term length

    Most solar loans range between 15 to 20 years, but 25-year loans are becoming more common.

    In general, it can be wise to spread payments out over as many years as it takes to make the monthly payment closely match the average energy bill savings provided by the solar installation. That way, you can “break even” in the initial years of the loan and save money each year as electricity rates increase.

    Many large solar energy companies like Sunrun, SunPower, and Sunnova now offer 25-year solar loans that also come with 25-year labor and workmanship warranties. Essentially, these are long-term service agreements where you end up owning the solar panels at the end.

    For some people, these very long loans work out okay. There can be value in choosing a long-term relationship with a company that is built to last for 25 years. Others will prefer to take shorter loan terms in order to more quickly take ownership of their solar panels. What works best for you is your decision to make.

    Balloon payments and how solar loans work with the federal tax credit

    The concept of a balloon payment is very important when it comes to solar loans. Nearly all lenders calculate the monthly payments for the loan based on the idea that the homeowner will pay off up to 30% of the loan value within 12-18 months after loan origination.

    That 30% amount is equal to the value of the federal solar tax credit, and this payment is often referred to as the “Incentive Payment”.

    This is such an important concept to understand because the tax credit can often be worth thousands of dollars, and it is not a sure bet that everyone will be able to claim it, at least not the entire value before 18 months. The tax credit is “non-refundable,” which means the taxpayer’s tax liability limits it.

    In plain English, that means if you don’t owe at least as much money as the value of your tax credit, you will have to carry over the extra portion to the next tax year, but you will still owe the full amount of the credit as the balloon payment.

    There are several ways this payment is structured with the loan. Some solar loans include the value of the tax credit and re-amortize after 16 to 18 months. In this case, the monthly payment will simply increase if you don’t make the balloon payment.

    Some lenders actually offer a separate, low or no-interest loan for 30% of the system cost, with a term of only 12-18 months.

    If you take a solar loan, it is important to understand whether your lender requires a balloon payment, whether you’re eligible for the full amount of the solar tax credit, and what will happen if you cannot make the full payment.

    Speak with a trusted financial advisor when considering a solar loan to make sure you understand how it will affect you.

    How much can you save with the solar tax credit?

    Solar loan alternatives

    There are a few alternatives to a traditional solar loan for homeowners to explore, including home equity loans or lines of credit (HELOCs) and solar leases and PPAs.

    HELOC

    A HELOC is a line of credit available to homeowners with equity available in their homes.

    Advantages of HELOCs include the lack of a dealer fee, no requirement to pay the amount of the federal tax credit within a certain period, and low-interest rates at or near current mortgage rates. Another plus for a HELOC is that it is a flexible way to pay for more than just a solar panel installation.

    The disadvantages of using HELOCs for solar panels are their relative difficulty to obtain. They have stricter credit score requirements, require equity in the home, result in more paperwork for the borrower, and sometimes include closing costs and other fees.

    PACE loans

    PACE, which stands for Property-Assessed Clean Energy Financing, is a newer kind of loan that offers some flexibility to low-income borrowers, requires no minimum credit score, and is paid back through the homeowner’s property tax bills.

    Be extra careful with PACE loans, as there has been some controversy surrounding them. Plenty of homeowners who have financed through a PACE loan have landed themselves in financial hot water with reports of insanely high property tax payments they can’t afford. Be sure to do extensive research on them beforehand.

    PACE programs exist in a handful of states, including Florida, California, and Missouri.

    Solar leases/PPAs

    Also known as third-party-owned systems, solar leases and power-purchase agreements (PPAs) work almost the same way as leasing a car. With a solar lease or PPA, you do not have ownership over the solar panels on your roof; your installer does.

    You pay a certain monthly amount to the company to use their solar panels for a set period of time. Essentially, swapping your utility bill for a lower monthly lease payment all while investing in that good, clean solar power.

    The only difference between a lease and a PPA is that a lease is a set monthly payment that does not change, a PPA has monthly payments that can change based on how much your solar panels produce.

    Solar loan FAQ

    Here are some of the most important questions people ask about solar loans:

    Q: Do solar loans require a down payment?

    A: Most solar loans do not require a down payment but instead include a finance charge or dealer fee that gets wrapped into the principal of the loan.

    Some lenders offer two separate loans at the time of sale: one for 70% of the system cost that is amortized over many years (10 to 20 is common) and another for 30% that is required to be repaid within 12 to 18 months. This second loan is based on the value of the federal solar tax credit, which can earn homeowners a tax credit of 30% of the cost to install the system when filing taxes for the year the system was placed into service.

    Q: Is a solar loan considered a second mortgage?

    A: A solar loan is not considered a second mortgage, but some lenders place a special lien on the solar installation called a UCC-1 filing (from the Uniform Commercial Code). This UCC-1 lien protects the lender’s interest in the solar property in case of default until the loan is paid in full and is a public record.

    The UCC-1 filing can sometimes cause confusion with mortgage lenders, who can see the filing and might consider it a lien on the property if the homeowner seeks to refinance the mortgage or moves to sell the property. In this case, you can work with the lender to have them provide proof that they have no interest in the property other than the solar system.

    Q: Can you pay off a solar loan early?

    A: Nearly all solar loans come without a prepayment penalty and can be paid off at any time. Like other loans, you should contact your lender for a payoff quote. Some people have chosen to pay off solar loans as part of refinancing in order to roll the remaining cost of the loan into a new mortgage.

    Q: What is the minimum credit score needed to qualify?

    A: In general, a credit score of 580 is required for most kinds of solar loans. Some solar lenders advertise that they have no minimum credit score requirements, while others place limits on buyers’ credit scores or require a filing fee based on credit score. Buyers with better credit scores can receive better interest rates on certain solar loans.

    Bottom line: are solar loans a good idea?

    Loans can be a great way to pay for solar panels. If you can design a loan with a monthly payment less than or equal to the average monthly savings the solar installation will generate, you can essentially be cash flow positive from day one.

    But it’s still important to be careful when it comes to money. Some unscrupulous solar installers and/or lenders target the cost of the systems they sell so that the monthly payment on the loan is close to the energy bill savings the solar installation will provide. This can mean the price of the system is much higher than it would be if the homeowner paid cash or purchased the system somewhere with lower electricity rates.

    In a perfect scenario,  find a solar loan with a reasonable interest rate and dealer fee. It’s important to understand that the higher the dealer fee – the lower the interest rate, and vice versa. This might require you to shop around for financing options. SolarReviews always recommends getting at least three quotes from different companies so you can find the best deal possible.

    Get solar loan quotes from installers near you
     - Author of Solar Reviews

    Ben Zientara

    Solar Policy Analyst and Researcher

    Ben Zientara is a writer, researcher, and solar policy analyst who has written about the residential solar industry, the electric grid, and state utility policy since 2013.

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