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By Kaitlyn Short and Jenna Vasquez
What do a pool, a car, and a solar panel system have in common? They all cost a lot of money! Sometimes these major home purchases require financing such as a loan or lease.
If you are here, you are probably considering a switch to solar. But the big price tag might make you hesitate or second guess your interest. We’re here to guide you through your options and help you see if solar is right for you.
You have essentially four financing options when going solar:
For those looking to finance a new solar panel system, we are going to cover the cost of solar panels, the different financing options, factors to consider when choosing a solar financing method, and the federal tax incentive to go solar.
The cost of solar panels is typically wrapped up in the total cost of a solar power system, which the Solar Energies Industry Association estimates to be between $16,000 and $21,000.
Different panels have different costs, but most typically, you will be buying either monocrystalline panels (black in color, most efficient) or polycrystalline panels (blue in color, less efficient than monocrystalline, but more affordable).
Monocrystalline panels are made with a single sheet of silicon, making them the most efficient type of panel. Because of this, you’ll end up paying more per monocrystalline panel on your home (roughly 20–40% more per panel), but the increase in efficiency will be to your benefit.
Polycrystalline panels are made from multiple silicon crystals, which renders them less efficient overall, but more affordable upfront. These panels are still a popular choice among homeowners.
Homeowners can get a basic idea of what their solar system will cost or how their utility bills can be offset by solar power using Google’s Project Sunroof. Simply input your street address and Google will use its maps technology to examine the size of your roof and see what solar system options are available to you.
Although the price of solar has dropped over the last 10 years, the overall cost is still substantial considering the median household income in the U.S. was $67,521 in 2020.
However, a solar panel system can help you save on your electric bill and fight the rising cost of electric energy. The amount of return you get on your purchase depends on the type of financing you choose and how much you can pay upfront.
We cover the four major categories of solar financing below.
Paying for a solar panel system with cash is the most straightforward financing option. If you choose a cash purchase, you can save money by avoiding interest payments and loan fees. You also qualify for the full federal solar tax credit. Sometimes solar companies will even give you a discount on the overall cost.
If you buy with cash, you don’t have to worry about monthly payments, and you’ll instantly start seeing reductions in your monthly utility bill. A solar purchase is often considered an investment because it adds value to your home and helps you save on electricity once you pass the payback period.
However, a cash purchase is often not the most feasible for homeowners. The solar tax credit lowers the overall cost, but you need to be financially able to wait for your tax refunds the following year.
Plus, you’ll need to wait 5 to 10 years before you hit a break-even point. This time period can vary depending on your energy usage, the total cost of your system, and the size of your system.
Best for — homeowners who have a stable income and can reasonably pay the large upfront cost without creating a risky financial situation for themselves
Getting a loan to pay for solar is a popular choice for homeowners. Loans allow you to own your solar system from the beginning, and often, some or all of the energy generated from your system offsets the cost of utilities or your monthly loan payment.
If you’re in the market for a solar loan, you have a few options to consider.
Most major solar companies partner with or have agreements with preferred lenders that they typically work with. Sometimes these agreements can mean better interest rates or simply streamline the solar loan process.
Be sure to ask your solar panel company about its preferred lender(s), and see if there might be any deals or discounts to take advantage of by going that route.
Best for — homeowners actively working with a solar company that already partners with a lender
Another option to get a solar loan is to research the best personal loan companies, and select the one that is a good match for your situation and the amount you are looking to borrow.
With an unsecured personal loan, you don’t need to provide any form of collateral (i.e. a physical asset that can be seized by your lender if you don’t keep up on your payments). To qualify for these types of loans, you typically need a credit score above 550, and an excellent credit score above 700 will usually mean a lower interest rate on the loan.
To use a personal loan to purchase your solar system, you take out the loan with the third-party lender of your choice, and use that cash to pay upfront for your solar panels and installation. Then, you pay off the loan according to the details and terms of your third-party lender agreement.
Best for — homeowners with excellent credit scores who can qualify for favorable loan terms
Home equity loans are a secured loan in which you borrow money from the equity you have built up in your home through paying off your mortgage. These loans are also commonly called second mortgages.
Typically, you can borrow up to 85 percent of the amount of equity you have built in your home, so if you have a $400,000 home and have paid off $100,000 of it, you could borrow up to $85,000 with a home equity loan.
These loans tend to have lower interest rates since they are secured using your home as collateral, but also are risky in the sense that if you don’t keep up on your payments, your home can be seized by the lender.
Best for — homeowners who already know how much they’re going to spend on their solar system
There are other forms of home improvement loans you can use to help pay for solar, such as home equity lines of credit (HELOCs) or cash out refinance loans.
With HELOCs, you get approved to borrow a portion of the equity you have approved in your home, but unlike home equity loans which come to you as a lump sum, HELOCs have a draw period in which you can choose when and how much you want to borrow from your own equity.
Having a home equity line of credit is beneficial if you plan to sell your home in the foreseeable future, because it is a way to borrow your own money (essentially), so you don’t have a big loan to pay off before you can sell your home.
Best for — homeowners planning to sell in the foreseeable future
A second form of home improvement loan is a cash out refinance loan, in which you change the terms of your existing mortgage loan and take out some of the equity you have built in cash. This means that you will essentially be lowering the equity you have accrued, but you won’t have to take out a second mortgage.
It is best to change the terms of your mortgage when interest rates are low, so you can make sure the cost of the solar system is worth financing in this way.
Best for — homeowners buying solar when interest rates are low
The government offers clean energy loans for homeowners looking to make upgrades toward being more energy efficient and environmentally conscious. One such loan is an R-PACE loan, which is short for a Residential Property Assessed Clean Energy loan.
According to Kerry Sherin from Ownerly, an R-PACE loan gives you the opportunity to combine the loan to your house and pay it back over time with your property taxes.
The government also offers energy efficient mortgage loans that “[help] families save money on their utility bills by enabling them to finance energy efficient improvements with their FHA-insured mortgage.”
Best for — homeowners who would feel more secure taking a loan through the government, and who qualify for government-sponsored loans
In general, homeowners should try to qualify for a loan before considering a solar lease. With a solar lease, you are essentially paying the solar company to rent rooftop solar panels for you. Most solar leases still require a credit score of at least 600 to qualify.
A solar lease doesn’t require any upfront payment, but some companies give you the option to make an initial down payment to lower your monthly payments. Your monthly lease payments may increase by 3 to 4 percent every year if there is an escalator clause included in your agreement.
Most solar leases typically last for 10, 15, or 20 years, which can make it difficult to transfer to another homeowner if you plan to move before your contract expires. If you do make it to the end of the lease, some companies offer an option to buy, an option to renew your lease, or an option to uninstall the solar panels.
If you choose a solar lease, you usually don’t have to worry about repairs and maintenance for your panels.
A Power Purchase Agreement or PPA is a specific type of lease agreement to purchase power generated by the solar panel system installed on your home. The solar company sets a price per kilowatt-hour, and you'll pay a variable amount each month depending on your energy usage and the panel energy production. Like solar loans, power purchase agreements can also have escalator clauses that allow solar companies to raise the price per kilowatt-hour during the contract period.
Best for — homeowners who don’t qualify for solar loans or don’t own their current home
Now that you know a bit more about the different types of solar financing available and whom they might be best for, read through the questions below to help narrow down the best financing option for your specific situation.
Prioritizing your down payment can help you save on your monthly payments and the long-term cost of your system. It can also shorten the payback period, or the time it takes for you to start seeing returns on your solar system.
If you don’t have money to put towards a solar down payment just yet, you may benefit from waiting a few months to go solar while adding to your savings. Some solar companies offer $0 down loans and leases for those who can’t set aside money for a down payment.
We know you can’t predict the future, but it’s always good to have a 5- to 10-year plan in mind. According to the United States Census Bureau, the average American will move about 12 times in their life. If a person lives to be 80, that means they will have moved about every 7 years.
Moving when you have a solar loan or lease attached to your house can add stress. The buyer must be able to qualify for the solar loan to purchase your house. If you decide to lease a solar system, you may reduce your list of prospective buyers due to people being unwilling to take over a solar lease.
Unless you plan to stay in your house the duration of your loan contract length, you should consider paying off your loan early. Before you sign a lease or loan agreement, make sure to read the terms and conditions about transferring a loan or a lease.
Your credit report will tell you what financing options are available to you. Solar loan lenders look at your credit utilization ratio, credit score, amount of debt, record of steady income, recent loan applications, and payment history to determine your loan eligibility.
Many solar loan lenders required a minimum credit score of 600 or 650. A solar lease also requires a good credit score. A better credit score will also give you a better interest rate if you decide to get a solar loan.
If you have a low credit score, you may want to consider using a credit repair service or work on paying off any of your current debt to improve your score.
Solar is a big decision because it involves a lot of money. If you are considering the switch to solar, you should spend time researching options in your area.
Companies may differ in the type of financing they offer. We’ve included three top solar companies below and their current financing options.
Founded in 1985, SunPower is a pioneer in the solar industry offering reliable equipment and industry-leading warranties. SunPower is offered in 28 states. The company offers the following different payment options: cash, solar loan, solar lease, and power purchase agreements.
ADT Solar is another reputable solar company operating in 20 states. The company offers affordable solar energy solutions and battery storage options. Like SunPower, customers can add an ADT solar system using a solar purchase, solar loan, solar lease, or power purchase agreement.
ADT Solar Verified
With a 4.5 out of 5 star rating on BestCompany.com, Blue Raven Solar is a trusted solar company with competitive pricing and modern, aesthetic solar systems. The company also offers industry-leading warranties and innovative technology. Available in 12 states, Blue Raven solar offers cash financing, solar loans, solar leases, and power purchase agreements.
Blue Raven Solar Verified
You may have heard chatter about government or tax discounts if you make the switch to solar. Well, the rumors are true— as of 2022, the US government has extended the federal solar tax credit (also known as the investment tax credit) until it phases out for good in 2035.
Basically, the benefit is this: you can subtract 30 percent of the cost of installing solar panels on your home from the amount of taxes you owe the government.
Plus, this benefit rolls over to subsequent years if you owe less in taxes than the benefit covers (i.e. if you qualify for a $7,000 tax deduction, and you only owe $5,000 in taxes for a year, then the following year, you can use the remaining $2,000 tax deduction toward that year’s taxes).
If you meet the following criteria, you qualify for the solar tax credit:
To calculate the amount that is eligible for the 30 percent tax deduction, you can include
You can claim the solar tax credit when you submit your tax return for the year you purchased the solar system (even if you’re still paying off the loan).
You will fill out IRS Form 5695 with information about the cost of your system, the address where you installed it, etc. Since there are other tax forms and information involved in claiming the credit, we recommend you consult with an accountant as you fill out any tax forms to make sure everything is done correctly.
With rising energy prices and an ever-growing concern for our environment, more and more people are turning to solar. As with all investments, the right time to start is yesterday, but the next best time is today.
The federal solar tax credit makes going solar much more affordable and possible for many homeowners. Still, a major purchase requires a hard look at the cost and benefit for your financial situation.
Before comparing quotes and financing options, we suggest asking yourself these questions to evaluate your finances and current energy needs.
November 23rd, 2022
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