How to Finance Solar Panels: A Comprehensive Guide (2023)

Though the benefits of solar panels and solar energy are quite impressive, it doesn’t change the fact that the upfront costs are pretty hefty. In fact, in 2023, the cost of installing a 6-kW solar panel system after federal solar tax credits can range from $16,870 to $23,170. Though the DIY approach can save you money as prices are much lower, the typical home still needs between 17 and 21 solar panels. And the truth is that most homeowners don’t have cash lying around to fund the expense. You may want to know how to finance solar panels to improve your home's efficiency.

Highlights & Key Takeaways

• Most homes require between 17 and 21 solar panels, and costs after credits can range from $16,870 to $23,170
• Many homeowners can save between $20,000 and $97,000 over the lifetime of their solar panel system
• Personal loans may be a good option if you need the loan proceeds quickly and have solid credit scores to qualify for the most competitive interest rates.
• The majority of homeowners with solar panels used a personal loan to make their purchase

What Type of Financing Is Available for Solar Panels?

If you are interested in financing the purchase and installation of solar panels, you have several options. Most homeowners opt to use personal loans to finance their solar panel purchases. Consider a home equity loan, a line of credit, or a refinanced mortgage. Each option has advantages and disadvantages that can influence your term length, how much you pay each month and your interest rate. Let’s dive into the various options below. 

Solar Panel Loans

Homeowners can finance solar panels and the installation through loans that offer fixed interest rates and a consistent monthly payment. A solar panel loan requires the borrower to pay on a monthly debt payment to pay for their solar panels. And one way of deciding if you can afford to take on the loan is that if your estimated loan payments are less than your average monthly electrical bill, you will likely save money. However, you should know that maintenance costs and the costs of an annual inspection can increase your annual expenditure for home solar panels.

To discover which loans for solar panels we recommend and how to obtain the necessary financing, read on.

Pros and Cons of Solar Panel Loans

There are some advantages and disadvantages to solar panel loans. 

Pros

• You can take advantage of tax rebates and incentives like you would if you paid them outright
• Short repayment terms
• Fast funding
• No collateral

Cons

• You are responsible for maintaining your solar panels, even though you don’t fully own them yet.
• You will need to take on additional debt with monthly payments. 
• Applying for a solar panel loan will result in a hard credit inquiry to your credit report, resulting in a five-point ding to your score.

Solar Panel Leasing 

Leasing solar panels means you pay a monthly fee to use them for a set period without owning them, while financing means you purchase the panels outright or with a loan and own them. In most cases, when you lease solar panels, they remain the property of the leasing company, and that company will handle maintenance and repairs. With financing, you're responsible for maintenance and repairs but can be eligible for tax credits and other incentives. The decision truly depends on your financial goals and priorities and how much you want those solar panels.

Pros and Cons of Solar Panel Leases

However, you should be aware of more advantages and disadvantages to solar panel leasing.

Pros

• You can avoid taking on those hefty up-front costs
• Avoid installation and maintenance fees
• You can get solar panels and save on energy costs

Cons

• Your costs will be more in the long run
• Solar panel leases are not eligible for federal tax credits or any local incentives that may exist in your community
• Having a lease can scare away home buyers should you decide to sell your house
• The potential for annual ROI ranging from 10% to 30% may be missed based on location, state incentives, and property characteristics.

Contractor Financing

Though not all solar contractors offer it, you may be able to seek financing for solar panels and installation directly with your contractor. In this case, the solar panel contractor acts as the lender, offering you a loan to cover the cost of the solar panel system. You then make monthly payments to the contractor until the loan is paid off. This can be a convenient option for homeowners who want to finance their solar panel installation with a trusted contractor.

Pros and Cons of Contractor Financing

But as with anything, contractor financing has pros and cons.

Pros

• The convenience of having the contractor handle the financing
• Potentially lower interest rates compared to other financing options
• Possibility of bundling installation and financing services into one contract

Cons

• Not all solar panel contractors offer financing, so this option may not be available in every case
• interest rates and terms can vary widely between contractors
• Contractor financing may require a lien on your property until the loan is paid off, impacting your ability to sell or refinance your home.

Power Purchase Agreements (PPAs)

A lesser-known option to help you get the money you need for your solar panels is called Power Purchase Agreements (PPAs). This option is a great way to get renewable energy without spending money upfront. With a PPA, a third-party developer is responsible for installing, owning, and operating your property's solar energy system. Then, you agree to buy the system's electric output for a predetermined period. This means you can enjoy stable and often low-cost electricity without worrying about upfront costs.

In addition to being a good deal for customers, PPAs also benefit the system owner. They can take advantage of tax credits and receive income from the sale of electricity. And it's not just for renewable energy systems – PPAs can also be used for other energy technologies like combined heat and power (CHP).

Overall, a PPA is a win-win for customers and system owners. Customers like you get affordable and sustainable energy, and owners get a steady source of income. It's definitely worth considering if you're looking for an easy way to go green without breaking the bank.

Pros and Cons of Power Purchase Agreements (PPAs)

PPAs have some pros and cons you should be aware of.

Pros

• Positive cash flow as PPAs can cover 100% of project cost
• A third party installs, owns, and maintains the solar energy system so that you can avoid the risks with solar panel ownership.
• Regular payments are treated as an operating expense similar to a standard utility bill.
• PPAs lock in energy prices at an agreed-upon rate so you don’t have to worry about utility rate fluctuations

Cons

• You may end up paying a rate higher than the market rate
• Only 15 states in the U.S. allow the use of PPAs 
• PPAs can have complex contracts and higher transaction costs

Solar Panel Rental

As you know, financing solar panels allows you to own the panels and take advantage of all the incentives, but it means you need to pony up the funds at the beginning of the process. Leasing your solar panels allows you to pay a monthly fee to use them, but you don’t own them. And you don’t get access to the tax credits. On the other hand, renting means you will pay a monthly fee, but the panels remain the property of the rental company, and you have no option to purchase them at the end of the rental period. 

Renting can be a good option for those who don't want to commit to a long-term lease or don't have the upfront cash to finance a purchase, but it may not be the most cost-effective option in the long run.

Pros and Cons of Renting Solar Panels

Here are the pros and cons of renting solar panels.

Pros

• Renting solar panels allows you to use solar energy without paying a large sum upfront
• Rental agreements typically have shorter terms than leases, which means you can try out solar energy without committing to it for too long
• The rental company is responsible for the maintenance and repair of the panels, which means you won't have to worry about those costs

Cons

• With renting, you don't own the solar panels so you won't be eligible for tax credits or incentives
• Monthly rental fees can be higher than loan or lease payments, so you could pay more in the long run
• No option to purchase the panels at the end of the rental period, so you won't be able to take advantage of the energy savings they provide after the rental term ends
• Renting solar panels is not readily available across the U.S.

What’s the Best Way to Finance Solar Panels?

The best way to finance solar panels is really up to you. However, for most consumers, a solar panel loan is the way to go. According to Wood Mackenzie, loans are anticipated to make up 70% of residential solar installations in 2023 as the market experiences demand pull-in for customer-owned systems before the investment tax credit steps down. But how do you determine what solar financing is right for you?

Is Solar Panel Financing Right for Me?

Paying for solar panels and their installation with cash is the most cost-effective option. You'll start saving money immediately because you won't have loan payments eating into your utility bill savings. However, most consumers don’t have the cash to pay for solar panels upfront. But don’t despair, as there are other financing options for you. You can opt for a personal loan, home equity financing, a government loan program, or work with a solar contractor to secure financing.

When choosing a financing option, focus on minimizing the total interest paid while ensuring that you can comfortably manage the monthly payments. Remember that you are taking on additional debt, and it is essential that you can make your minimum monthly payment on time every month to protect your credit score. But don't forget to consider factors like tax incentives, repayment terms, and the annual percentage rate you're likely to qualify for. With the right financing, you can start enjoying the many benefits of solar energy while keeping your energy costs low.

Here are some indicators that a solar panel loan (personal loan) is your best option.

• You want your new solar panels installed ASAP
• You have a good credit score and can likely qualify for a low APR
• Though you don’t have the cash to pay for your solar panels upfront, you don’t want to carry that debt or monthly payment any longer than you have to
• You don’t want to use your home as collateral for the loan

What to Look for When Financing Solar Panels

If you’ve decided to get solar panels for your home to experience all the economic benefits, take your time and don't let anyone push you into a decision. Let your salesperson know that you plan to shop around for the best rates, so don’t commit to the first bid you receive. And when it comes to financing, even a small difference in interest rates can make a big difference over the life of your loan, so it's worth comparing options.

When evaluating your financing options, keep the following in mind:

• Look for a low-interest rate, which will help you pay off your loan faster and maximize your energy savings
• Consider repayment terms carefully and look for terms that allow you to make your payments without paying more interest than you need to.
• Look for perks, as some lenders offer discounts for autopay, online account management, and unemployment protection

What Are the Best Solar Panel Loans?

Switching to solar energy is a great way to power your home sustainably and reduce your reliance on the proverbial grid. While it can be costly to purchase and install solar panels, plenty of financing options are available to make them more affordable.

To find the best solar panel loan for your needs, look for options that offer competitive interest rates, low fees, and flexible repayment terms. With no down payment required, solar panel loans can be a convenient and accessible way to start enjoying the benefits of solar energy. 

Here is what you need to know about the most common types of solar panel loans.

Personal Loans 

Personal loans are likely the best way to finance solar panels, as they typically come with fixed interest rates and fixed monthly payments. Personal loans offer faster access to cash with no origination fees and are unsecured, so you don't have to put your home up as collateral. However, you need good or excellent credit to qualify for the lowest rates. Personal loans may be the best option if you need the loan quickly, have solid credit scores, and will likely qualify for the most competitive interest rates.

Government Loans

FHA's PowerSaver program offers loans to help homeowners finance solar panels and other energy-saving upgrades. There are two loan options available: 

• PowerSaver Second Mortgage
• PowerSaver Energy Rehab 203(k) Loan

Homeowners must meet specific qualifications to be eligible for these loans, such as a minimum credit score of 660 and a debt-to-income ratio of 45% or better. Government loans offer competitive interest rates and extended repayment terms of up to 20 years. However, borrowers must stay under FHA's spending limit, and finding an experienced lender can be challenging.

Home Equity Loans

A home equity loan is a great option if you're looking to finance your solar panels. With up to 85% of your home's equity available, you could receive a loan of up to $85,000, more than enough to finance your solar energy project. And because your property serves as collateral, you may qualify for a lower interest rate. Remember to make timely payments, as the bank can repossess your home if you default on the loan.

Home Equity Line of Credit (HELOC)

Where a home equity loan gives you a one-time lump sum payment with a fixed interest rate, a home equity line of credit (HELOC) allows you to borrow money repeatedly from the maximum amount available. HELOCs can be a flexible financing option for purchasing solar panels. 

Remember that HELOCs usually have a variable interest rate, which means your payments may fluctuate based on changes in the interest rate and your outstanding balance. However, the flexibility and convenience of a HELOC make it a good option for homeowners looking to finance their solar panel purchases.

How to Get Solar Panel Financing

To get solar panel financing, you must look at various lenders. And just like you shouldn’t sign for the first solar panel bid you receive, avoid the temptation to accept the loan terms for the first lender that you look at. In most cases, you can batch your loan applications and prequalify for various lenders. This will allow you to compare rates and terms to determine your best deal.

Here’s what to look for when considering solar panel loan options.

• Interest rates: Use an interest rate calculator to see how much the purchase of your solar panels will cost 
• Minimum monthly payment: Know how much your potential loan payment will be and ensure this is something you can take on every month
• Fees: Find out if the lender charges an origination fee, late payment fee, or has an early payoff penalty
• Payback period: Check to see your options for the loan duration
• Downpayment: Determine if a down payment is required for the loan and if it fits within your budget
• Borrowing limits: Check for financing limits and make sure they are sufficient to cover the cost of your solar panel installation
• Credit score: Check the minimum credit score requirements for the loan and make sure you meet the criteria before applying

Once you have determined the lender that will work best for your needs, it’s time to apply. Before starting the process, be sure to gather the following important documents. Preparing ahead will ensure you don’t need to quit the application and start the process over later.

• Proof of identity, such as your driver’s license or passport
• Employer and income information - you may need to upload copies of your paystubs, tax returns, W-2 or 1099s, bank statements, etc.
• Proof of address, such as a utility bill or mortgage statement
• A summary of your monthly expenses, though some lenders may ask for an itemized list of your recurring monthly expenses

What are the tax benefits of getting solar panels?

Getting solar panels can come with some exciting tax benefits for homeowners. The federal government offers a tax credit known as the Residential Renewable Energy Tax Credit, allowing homeowners to deduct up to 26% of the total cost of solar panel installation from their federal taxes. 

This credit applies to both primary residences and second homes, and there is no cap on the credit amount. Additionally, some states and localities offer their tax incentives, making solar panels an even more appealing investment for homeowners looking to save money and reduce their carbon footprint.

Final Word

It’s estimated that the average home can save between $20,000 and $97,000 over the lifetime of your solar panel system. Though the exact amount depends on the cost of electricity in your area, this can be some lucrative savings. And these enticing benefits can leave you wondering how to finance solar panels. Be sure to shop around for the best solar panels for you, and consider the rates and loan terms before deciding on your solar panel loan lender.