Solar Financing Options Explained: How to Pay For Your Solar Panels

While 2.5 million homeowners in the US have successfully installed solar panels, financing this investment remains a significant hurdle for many. Solar financing is an exciting opportunity that allows homeowners to pay in installments or monthly payments instead of bearing high upfront costs. But what are the options available and how can they be navigated effectively?

How Much Do Solar Panels Cost?

Before we get to solar financing options, let’s take a look at how much solar panels actually cost, considering both upfront and ongoing expenses. Here are the key elements you should account for:

Installation: The most significant upfront cost is the purchase and installation of the solar panel system itself. The cost can vary based on the size of the system, your geographical location, and the type of panels you choose. According to a report from Wood Mackenzie, the average residential solar cost in Q1 of 2023 was $3.28 per watt. This implies that an average 8.6 kilowatt system would cost around $28,208 before incentives and rebates. However, this cost can rise depending on the complexity of the installation and additional components like solar batteries and electric vehicle chargers.

Maintenance: Solar panels generally require minimal maintenance. However, you may incur costs for cleaning the panels, especially if you live in a dusty area, and occasional repairs. You should also plan for eventual inverter replacement, as inverters tend to have a shorter lifespan than panels.

Roof repairs or upgrades: If your roof is old or not in optimal condition, you may need to repair or replace it before installing solar panels. This can add to the upfront cost but is a necessary investment to ensure the longevity of your solar system.

Permitting and Inspection Fees: Depending on your locality, you might need to pay for permits and inspections associated with solar panel installation.

How Much Money Will I Be Saving?

Estimating your potential savings from solar panels involves understanding your unique circumstances. This includes factors such as the size of your solar system, your home’s energy consumption, and the local utility rates. Essentially, your savings come from the reduction or elimination of your energy bills and credits you receive for excess energy produced by your solar system.

Calculating Your Payback Period

One way to determine your savings is by calculating the payback period – the time it takes for your monthly energy savings to cover your initial solar panel investment. This period depends on your upfront costs (after incentives and rebates), your average monthly energy bills, and the proportion of those bills covered by your solar energy production. To estimate your payback period, follow these steps:

Calculate your upfront costs: These include installation, maintenance, and potentially roof repair costs.

Subtract incentives: Subtract the total value of tax credits, rebates, and other incentives from your upfront costs.

Estimate your annual savings: Look at your energy bills and estimate your potential monthly savings from solar energy. Multiply this by 12 to get your annual savings. Divide the adjusted upfront cost by your annual savings. The result is your payback period in years.

Keep in mind that after the payback period, every dollar saved is a dollar earned. Your solar panels can continue to produce energy and generate savings for 25 years or longer, providing a considerable return on your investment. For example, if you are currently spending $150 per month on electricity, this amounts to over $65,000 over the next 25 years. Hence, investing in solar panels can help you avoid future electricity spending and tap into renewable energy.

Remember to factor in elements like changes in utility rates and potential decreases in solar panel efficiency over time. While solar panels may produce slightly less energy over their lifespan, rising electricity rates can mean your solar savings increase over time. Furthermore, with net metering policies, any excess energy your solar system produces can be fed onto the grid for others to use, which can reduce your energy bill or even earn you credit for future use. However, these policies can vary by location and are subject to change, so it’s important to understand your local utility’s policy.

Home Value Increase

Finally, installing solar panels can increase your home’s value up to 4%,  providing an additional financial benefit. This means that even if you move before the end of the payback period, you can still recoup your investment through the increased sale price of your home.

Solar Financing Options

There are four primary ways to finance your solar panel installation — cash purchase, solar loans, solar leases/PPAs and home equity loans/HELOCs. Each comes with unique pros, cons, and best suitability scenarios.

Cash Purchase

A cash purchase is one of the most straightforward and popular methods of obtaining a solar panel system for your home. It entails paying the entire cost of the system upfront. This method of acquisition may seem daunting due to the sizable initial investment required; however, it carries significant long-term benefits and savings potential, making it an attractive option for those who can afford it. It typically begins with an in-depth consultation and assessment by a solar installer. This specialist will analyze your home’s unique specifications, such as roof orientation, available sun exposure, and your household’s energy consumption patterns. Following this, they will design a customized solar panel system tailored to your needs. Upon agreement to proceed, you’ll pay the entire cost of the solar panel system upfront. 

Pros:

• You reap the full benefits of solar power without any intervening financing fees, interest rates, or ongoing monthly payments, which can add up significantly over time. 
• Maximizes savings from solar, insulates you from future electricity rate increases, and gives you access to all financial incentives and rebates associated with solar.

Cons:

• High upfront cost typically ranging between $20,000 to $30,000.

Best For

Cash purchases are best for homeowners with sufficient funds available to pay for the solar panel system upfront and looking to maximize savings from solar.

Solar Loans

Solar loans are financing options that let you own a solar power system with no down payment, often at a lower cost than your current electricity bill. You then repay the loan in installments over a predetermined period, usually with interest. Obtaining a solar loan begins with a consultation with a solar installer who will assess your property and design a customized solar panel system based on your home’s requirements. Concurrently, you’ll need to approach a financial institution, such as a bank, credit union, or a solar financing company, to apply for the loan.

The lending institution will evaluate your credit history, income, and other financial factors to determine your loan eligibility, the loan amount, the interest rate, and the repayment period. The terms of solar loans can vary greatly, with loan durations typically ranging from 5 to 20 years, and interest rates can be anywhere from 0% to higher than 10%, based on the lending institution and your creditworthiness.

Pros:

• Enables you to own your solar system and enjoy its full benefits without needing to pay the entire cost upfront. 
• As the system owner, you’re also eligible for any federal, state, or local incentives and tax credits, which can offset a significant portion of the system cost.
• The energy savings combined with the tax credits and incentives can, in many instances, exceed the loan repayment amount, resulting in net savings each month.

Cons:

• Requires a good credit score to secure low rates.
• Like any other loan, a solar loan will appear on your credit report and can impact your credit score and your ability to borrow for other purposes.
• Some solar loans may come with a lien or UCC-1 filing on the system or property, making it difficult to sell your house without first paying off the loan. It’s important to understand the terms and conditions of the loan agreement before you proceed.

Best For

Solar loans are best for homeowners who want to avoid high upfront costs but still maximize their savings on electricity bills and receive all incentives and rebates.

Solar Leases or Purchase Power Agreements (PPAs)

Solar leases and PPAs are solar financing options that involve a third-party owner installing solar panels at your property and then selling you the electricity produced at a predetermined rate. Just like leasing a vehicle, solar leasing involves renting the solar panel system from a solar provider for a specified contract term, typically 20-25 years. In a solar lease agreement, the leasing company installs, maintains, and owns the solar panel system while you pay a fixed monthly lease payment.

This arrangement is beneficial for those who want to leverage solar power without dealing with the maintenance or the initial costs of system installation. It’s important to remember that as the homeowner, you won’t be eligible for federal or state solar incentives, as these benefits go to the system owner, which in this case is the leasing company. 

Power Purchase Agreements (PPAs) resemble solar leases in many aspects, such as no upfront costs, maintenance by the PPA provider, and fixed terms of 20-25 years. The significant difference is the payment structure. Under a PPA, instead of leasing the solar panel system, you agree to purchase the power generated by the system at a fixed per-kilowatt-hour (kWh) rate. This rate is generally lower than the local utility’s rate and stays constant throughout the agreement. Thus, you save money on your electricity bills and protect yourself against potential utility price hikes. However, like a lease, a PPA means that the system owner (the solar company) receives any available tax credits or incentives, not you. Also, as you pay for the power generated, your bill may vary based on the amount of electricity produced by the system.

Pros:

• Set rate for electricity for up to 25 years, third-party owner responsible for monitoring and maintenance.
• Savings can increase if the local utility company’s energy prices rise over time. 

Cons:

• Long-term financial commitments that can impact home sales, as the agreement must either be transferred to the new homeowner or bought out by the seller.
• The perceived savings can be less compared to other solar financing options. While they provide immediate savings on electricity bills, the total savings over time can be higher if you buy the system outright or with a loan, mainly because you’re eligible for tax credits and incentives in those cases.

Deciding Between Solar Lease and PPA

While both solar financing agreements allow for solar adoption without upfront costs and the benefits of predictable energy expenses, they differ in payment structure and how electricity is billed. If you prefer a consistent monthly payment regardless of solar production, a solar lease could be the better choice. On the other hand, if you prefer to pay only for the power your system generates, a PPA might be more suited to you.

Best For

Solar leases/PPAs are best for homeowners who prefer someone else to monitor and maintain the system, aren’t eligible for tax incentives, or simply wish to reduce and lock in their monthly electricity bill.

Home Equity Loans and Home Equity Lines of Credit (HELOCs)

For homeowners who have amassed a substantial amount of equity in their properties, home equity loans or home equity lines of credit (HELOCs) offer additional financing avenues for solar panel installation. Home equity loans function similarly to personal loans, characterized by fixed interest rates, predefined repayment periods, and consistent monthly payments. Essentially, these loans allow you to borrow against the equity you’ve built up in your home. The predictability of payments can be especially appealing to homeowners who appreciate knowing exactly what their financial obligations will be each month. Instead, HELOCs provide a line of credit that you can borrow against, much like a credit card. This flexibility allows you to draw from the credit line as needed, instead of receiving a lump sum upfront. A notable difference is that HELOCs typically have variable interest rates, meaning that your payments may fluctuate based on changes in your account balance and interest rate.

Pros:

• If you have substantial home equity and a strong credit score, home equity loans and HELOCs generally offer low interest rates and favorable terms. 
• The interest you pay on these loans may be tax-deductible, leading to potential savings on your tax bill.

Cons:

• You can only borrow up to 85% of your home’s value, factoring in your first mortgage and the second loan. 
• The application process for these loans is typically more involved than for personal loans, often requiring additional paperwork and longer processing times.

Best for:

Home equity loans and HELOCs are particularly well-suited to homeowners who have a significant amount of equity in their homes and are confident that installing solar panels will further enhance the property’s value. If you find it challenging to secure a personal loan with a competitive rate due to your credit situation, these solar financing options might be worth considering.

Tax Benefits and Incentives for Solar Panels

One of the major incentives for many homeowners to install solar panels is the substantial tax benefits and other incentives that they can avail, making solar power more affordable. The governments, both federal and state, offer several tax credits, rebates, and incentives to promote the use of solar energy. The most notable one is the federal solar tax credit, which allows people to deduct 30% of the cost of installing a solar panel system from their federal income tax. This incentive will stay at 30% until 2033, after which it will drop to 26%. Additionally, local utility companies and state-level incentives can be accessed depending on your location. These can include:

• Solar Renewable Energy Certificates (SRECs): Some states have Renewable Portfolio Standards (RPS) requiring utilities to source a certain percentage of their energy from renewable sources. In these states, solar panel owners can earn SRECs for the electricity their systems generate, which they can then sell to utilities.
• Property Tax Exemptions: Some states offer property tax exemptions for the added value to your home from solar panel installation, meaning your property taxes won’t increase despite the property’s value increase due to the solar system.
• Sales Tax Exemptions: Certain states also exempt solar system purchases from sales tax, providing further savings on the upfront costs.
• Rebates: Some states, local governments, or utilities offer rebates on solar panel installations, reducing the system’s cost upfront.
• Net metering: A billing mechanism that credits solar panel owners for excess electricity added to the grid, offsetting utility costs during low production periods and providing substantial savings on electric bills. Availability and specifics vary by state, so understanding the policy in your area is essential.

These solar energy incentives can significantly reduce the payback period for your solar panel investment. However, they vary greatly by location and change over time, so it’s crucial to check which incentives are available in your area at the time of installation.

Wrapping Up

Investing in solar energy is a decision that’s financially sound and environmentally friendly. Multiple solar financing options are available, such as solar loans, solar leases, power purchase agreements, and home equity loans or HELOCs. Each carries its unique benefits and drawbacks, and the right choice ultimately depends on your personal financial situation and long-term goals.

Meanwhile, incentives like federal tax credits and local rebates can significantly reduce the upfront costs, while mechanisms like net metering can offset your energy bills and further increase the economic benefits. It’s crucial to remember that these options and regulations can vary greatly depending on your location. Embracing solar power requires careful planning and understanding, but with the right approach, it can lead to substantial savings, increase the value of your property, and contribute significantly to a sustainable future. As always, when considering significant financial decisions, it’s best to consult with a professional to ensure the optimal outcome. With the continually improving efficiency and affordability of solar technology, there has never been a better time to make the switch to this renewable source of energy.

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