Secured or unsecured: Which solar loan type is best?


Secured versus unsecured loans
Figuring out the right loan type for your circumstances can have a big impact on your overall solar energy savings.

With so many solar loan providers, finding the right financing option can be difficult. One way to narrow down your options is to determine whether a secured or unsecured loan is right for you.

Let's take a look at both types of solar loans, and examine the pros and cons of each.

Calculate your projected cash flow from using a solar loan to install solar panels

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    What are secured loans?

    A secured loan is a loan backed by a borrower's financial asset, otherwise known as collateral. 

    In most cases, a secured solar loan will be backed by either your home or the solar panel equipment itself.

    The purpose of attaching collateral to a solar loan is to minimize the risk for lenders. If a borrower defaults on their solar loan, the lender can seize the collateral and sell it to pay off the remainder of the loan.

    Some notable providers of secured solar loans include Dividend Finance and Sungage.

    Pros of secured solar loans

    • Lower interest rates: Due to lenders taking on less risk — and borrowers having more incentive to avoid a default — secured solar loans typically have much lower interest rates. With lower interest rates you will be paying far less over the duration of the loan.
    • Relaxed eligibility requirements: With a secured loan being backed and protected by collateral, lenders are more accepting of applicants. Therefore, you will find that the eligibility requirements are far less strict than for other loan types.
    • Larger loan amounts: Lenders tend to offer larger loan amounts on secured loans compared to unsecured loans. This is primarily due to the lower risk level of secured loans, and the confidence lenders have that you will pay back the loan.
    • Building your credit score: A secured loan can give borrowers with poor credit history the chance to build and improve their position. By simply meeting your repayment requirements, you can improve your credit score.

    Cons of secured solar loans

    • Risk of damaging your credit score: As secured loans are easier to qualify for, there's a higher chance of a borrower taking debt that they can't repay. A default on a secured loan can negatively affect your credit history and score for up to seven years.
    • Borrowers risk losing their collateral: If you fail to make your repayments and default on a secured loan, the lender has the right to take possession of your specified collateral. They’re then able to sell that collateral to pay off your secured loan.
    • Restrictions on loan usage: In many cases, lenders will only allow the amount borrowed to be used to purchase a specific asset. If you take out a secured loan to buy solar panels, that’s the only thing you’ll be able to use it for.

    Should you apply for a secured solar loan?

    A secured loan may be the best option if you’re looking at installing a larger, more expensive solar energy system, or if you have a poor credit history and credit score.

    It will allow you to take out a bigger sum of money as compared to unsecured loans. Furthermore, you should be able to qualify for one, even if you have a low credit score.

    Is a secured solar loan worth the risk?

    Given the risk of losing your collateral in the event of non-payment, you may be thinking that a secured loan isn’t for you. While this is a valid concern if a secured loan is used to buy an unproductive asset, in the case of solar panels things are different. With the savings you experience from going solar, defaulting on a secured solar loan is much less of a risk.

    In 2022, the average American household could save up to $1,500 a year on their electrical bill by installing a solar energy system. If the yearly savings you see from solar panels exceeds your total annual loan repayments, you should be well equipped to meet your loan payments.

    You will also see the benefits of the lower interest rates incurred with a secured solar loan.

    A fast and easy way to compare monthly savings from solar to your monthly solar loan repayments is with our solar calculator.

    Calculate whether your savings will outweigh your repayments

    What are unsecured solar loans?

    An unsecured loan is a loan that requires no collateral; it instead relies on the financial history and position of the borrower. This means that you’re able to finance your solar systems without putting a lien on one of your assets. A lien is a lender's legal right to claim one of your assets in order to satisfy a debt.

    With an unsecured loan not having an asset from the borrower backing the loan, these types of loans are considered a higher risk for lenders.

    If you’re looking for an unsecured solar loan, providers such as Enerbank or GreenSky could be a viable option.

    Pros of unsecured solar loans

    • No risk of losing collateral: An unsecured loan requires no collateral to be assigned by the borrower. This means that you’re not at risk of losing your assets if you were to default.
    • Multi-purpose loans: Unlike secured loans, which are often fixed to a specific use, you can often spend a secured loan any way you please. As such, you’re offered much greater flexibility.
    • Faster application and approval process: When a borrower does meet the lender’s eligibility requirements, then the application and approval process is relatively fast and simple. With many lenders, you can apply, be accepted, and receive an unsecured loan within just a few days.

    Cons of unsecured solar loans

    • Strict eligibility criteria: As an unsecured loan is not backed up by a borrower’s financial asset, lenders are forced to rely on their credit history, credit score, and income. This usually means that you must be in a strong financial position to qualify.
    • Higher interest rates: To cover the added risk of providing an unbacked loan, the interest rates demanded by lenders for unsecured loans can be considerably higher. Because you’re not risking collateral, you will need to pay more in interest.
    • Hidden fees: Lenders may compensate for the higher risks associated with unsecured solar loans, by adding expensive hidden fees such as origination fees.
    • Smaller loan amounts: In the absence of collateral, a loan default can cause a large loss to the lender. This is why financial institutions offer you smaller amounts for unsecured loans.

    Should you apply for an unsecured solar loan?

    An unsecured solar loan might be your best option if you have a strong credit history, a high credit score, and a steady source of income. Being in a strong financial position with a high credit score will help you meet lenders’ eligibility criteria, and fast-track the application process.

    The biggest benefit of an unsecured loan is the time factor. While a secured loan can take weeks or even months to be approved, an unsecured loan can take hours. A quick approval will allow you to experience the savings of solar sooner and prove especially useful if you're applying for solar credits and incentives that are time-sensitive, or due to expire soon.

    Summary: How to pick between a secured and unsecured solar loan

    To help you decide on whether a secured or unsecured loan type is right for you, we’ve listed borrower attributes for each loan type:

    Get a secured solar loan if you:

    • Have a low credit score and poor credit history.
    • Want to finance a large solar energy system.
    • Are looking to take advantage of low-interest rates.

    Get an unsecured solar loan if you:

    • Are in a strong financial position with a good credit score.
    • Don’t want to risk putting up any collateral.
    • Need to install a solar energy installation system quickly.

    Whichever loan type you select, make sure to check the fine print for any hidden fees and use our calculator to see if getting solar panels with a loan is worth it for you.

    See your projected cash flow from using a solar loan to install solar panels

    Key takeaways

    • A secured loan is a loan that is backed by a financial asset of the borrower, otherwise known as collateral
    • Secured solar loans usually have lower interest rates but come with a higher risk to the borrower.
    • An unsecured loan is a loan that requires no collateral but rather relies on the financial history and position of the borrower.
    • Unsecured loans often come at a higher interest rate but you aren’t at risk of losing your asset(s).
     - Author of Solar Reviews

    Cameron Bates

    Blog Author

    Cameron is a business analyst and content specialist at SolarReviews.

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