Solar Panel Loans: Understanding the Ins and Outs, and If It’s Right for You

What Kind of Solar Panel Loans Is Best for Me?

Whether you’re buying a home, a car, or financing any other major purchase, like adding solar panels to your home, the type of loan you choose needs to be right for you if you want it to benefit your life. And for today’s borrower, there are a variety of different ways to finance your solar panels.

In this guide, we’ll take a closer look at the different types of solar panel loans, so you can better understand the ins and outs of each to ensure you’re choosing the best loan for your needs.

What is a Solar Panel Loan?

Solar panel loans are a subcategory of home improvement loans that are specifically designed for homeowners looking to finance their solar panel installations. These loans offer homeowners a more convenient way to invest in a solar panel system because it doesn’t require them to pay for their solar systems upfront and they usually come with a range of payment structures, terms, and rates.

It is important to note that while solar loans are convenient, they usually offer a lower financial return than solar panel systems purchased with cash because you are paying interest on the amount borrowed over the life of the loan. That said, the immediate costs savings you get on your energy bills after having your solar panels installed can be put toward your monthly payment and help you deal with the interest in a comfortable fashion.

Comparing Important Solar Loan Features

From personal loans to Fannie Mae’s HomeStyle Renovation loans to home equity loans and home equity lines of credit, today’s homeowner has a variety of different financing options to choose from for their solar installations. But each of these offer sometimes vastly different solutions, so it’s important to compare all your options to help ensure that you choose the best financing option for you.

Some of the things you will want to compare include:

  • Secured vs Unsecured Loans
  • Loan Rates
  • Down Payment Requirements
  • Solar Loan Terms

Secured vs. Unsecured Solar Loans

When comparing solar loans, one of the first things you will notice is that these loans come in two types – secured and unsecured.

A secured solar loan is a loan that is backed by collateral, typically your home. Home equity loans and HELOCs (Home Equity Lines of Credit) fall under this category. Those with less than perfect credit can finance their solar panels using a secured loan known as a Residential PACE (R-PACE) loan. This type of loan is secured through a lien on your property tax and typically charge a higher interest rate than a home equity loan or HELOC. Unsecured loans, on the other hand, are provided without requiring collateral from the borrower. As a result, these loans are generally reserved for those with very good credit scores.

Loan Rates for Solar Panel Systems

Secured solar loans typically carry APRs between 3% and 8.5%, depending on your credit score. The rates on PACE loans tend to be at the higher end, with APRs averaging between 6.5% and 8.5%.

The rate range on unsecured loans is usually much higher because the loan isn’t backed by assets. The rates on unsecured solar loans can vary 6% to 30%, or even higher, so your credit score matters greatly with the rate you get. With an unsecured loan, the higher your credit score, the lower your rate will be.

Down Payment Requirements for Solar Loans

Most personal solar loans can be taken out without having to make an initial down payment. In those cases where a down payment is required, the amount is generally small, typically no more than $3,000.

On the other hand, if you want to borrow a home equity loan, then the lender may require that you pay a down payment. This type of loan also requires you to pay certain fees and closing costs, just as with a traditional mortgage.

Solar Loan Terms

Solar loans are available with a wide range of terms, with maturity periods as short as 3 years to as long as 30 years. However, the most popular loan terms for these types of loans are 10 to 20 years.

What is important to remember is that the length of the loan and the loan rate often go hand-in-hand. The general rule is that the longer the terms, the lower the loan rate.

Is a Solar Panel Loan Right for You?

A solar panel loan makes it easier for you to convert your home’s energy over to solar because it allows you to pay for your installation over time instead of all at once. Going solar provides an immediate benefit to your cash flow because the savings you get from your energy bill alone will help you save money every month even with your solar loan payment.

Installing solar panels also instantly increases the value of your home by an average of 4.1%. Using a $500,000 home as an example, installing solar panels will increase this home’s value by $21,500!

Getting the most out of your solar panels and your budget means doing your due diligence when comparing your solar loan options. Discuss all your available financing options with your lender, so you know exactly what to expect before you sign on the dotted line.

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