Most homeowners are aware that solar panels can potentially save them money on their monthly electric bills.

However, many aren’t able to come up with the $15,000-$25,000 it costs to buy a system outright.

The good news is that it is relatively easy to obtain a solar loan that allows you to purchase a solar panel system with little or no upfront costs.  

This blog will explain how solar loans work, and whether they’re right for you.

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Many homeowners rely on solar loans to finance home upgrades like solar panel installations. 

What is a solar loan? 

A solar loan is a loan taken out for the purchase and installation of solar panels. They offer a way for homeowners to invest in a solar panel system without paying lots of money upfront.

Many solar loan providers offer zero-down solar loans and options to pay down a loan early without penalty. 

Solar loans are generally considered a subcategory of home improvement loans. As such, they are available with many different payment structures, terms, and rates. 

Homeowners are attracted to solar loans because the purchase of solar panels results in immediate utility bill savings. The bill savings can then be used towards the monthly loan repayment. 

However, while solar loans are convenient, overall they offer a lower financial return than solar panel systems purchased with cash. 

Solar loans and the solar tax credit 

Yes, if you take out a solar loan to install a solar panel system, you still qualify for the solar tax credit.

The solar tax credit, also known as the investment tax credit (ITC) is a federal incentive that allows you to claim back 26% of your total solar panel installation costs when you file your taxes. 

Many solar loans are designed to take the solar tax credit into account. Solar loans offered by Mosaic, for instance, allow you to reamortize (pay down) your loan when you receive the tax credit, thus reducing subsequent monthly loan payments. 

See how much the solar tax credit and other solar incentives can save you

The most important solar loan features 

Here are the most important loan features to look at when you are comparing solar loans — and what each one means:

Loan type: secured vs unsecured 

There are two main types of solar loans: secured loans and unsecured loans.

Secured loans are backed by an asset, typically your home. As such they tend to have lower rates, with the APR usually falling between 3-8%. Home equity loans and HELOCs (Home Equity Lines of Credit) are the most common versions of these. 

Residential PACE (R-PACE) loans are another example; they are secured through a lien on your property tax. PACE loans are offered to people with lower credit scores, but they typically charge a higher rate than a home equity loan or HELOC. 

Unsecured loans, as the name suggests, are offered without an asset offered as collateral. These generally require a good credit score, and the better your credit score, the lower your rate. The APR on an unsecured solar loan can vary from 5.5% to 20%, or even higher.  

Solar loan rates 

Secured loans such as home equity loans and HELOC usually have APRs between 3-8.5%, depending on your credit score. The rates on PACE loans tend to be at the higher end of this spectrum, with APRs between 6.5 and 8.5%

The rate range on unsecured loans is much higher. In general, the rates vary from APRs of 6% to 30% or higher. Getting a rate at the lower end usually requires an excellent credit score. 

Solar loan down payment requirements 

Many solar loans are zero-down, i.e. they require no down payments. 

Where down payments are required, they are generally small, typically between $0 and $3,000. 

Solar loan lengths 

You can find solar loans ranging with maturity periods as short as 3 years to as long as 30 years. However, loan durations of 10-20 years are most common. 

The length of the loan and the loan rate are inversely related. That means that the higher the loan length, the lower the loan rate. 

Is a solar loan worth it?  

In most cases, yes — you stand to save a lot of money by taking out a solar loan.

One important reason is that when you buy a solar panel system — whether through a solar loan or otherwise, you instantly increase the value of your home. A study by Zillow found solar panels on average add 4.1% to property’s value. For a $500,000 home, solar panels will add a cool $21,500 in value.

As for the total savings and cash flow from a solar loan, this depends on how you choose to set your loan up.  Let’s look at two different cases where a homeowner comes out ahead by taking out a solar loan: 

Case #1: Cash flow-positive from Month One

In many cases, the homeowner will come out ahead from Month One. For instance, check out the diagram below generated by our solar panel calculator. It shows a utility bill customer who pays $199/month for electricity. 

After purchasing solar panels with a 20-year zero-down solar loan, their utility bill will be just $19, while their loan repayment will be $132 – they’re coming out a net $48 ahead.

zero-down financed solar system estimate

In the example above, the homeowner is essentially getting an asset that generates positive returns from Day One, all without spending anything out of pocket. For a homeowner looking for an instant return on investment, installing solar panels in this situation is a no-brainer!

Case #2: Aiming for maximum overall savings

Some homeowners may choose to prioritize overall savings over the lifetime of the panels. For example, the savings from a solar loan can be as high as $100,000 in solar-friendly states like California and New York. 

In order to achieve higher returns like these, you should seek a solar loan with the shortest possible contract term, say 5 or 8 years. This will result in higher monthly loan repayments that are equal to, or even higher than, your monthly electric bill. 

While you will not see positive cash flow during the duration of the loan, once the loan is paid off, you will enjoy essentially free electricity from your solar panels. And since solar panels are warrantied for 25 years — but often last longer — with a 5-year loan, you’ll enjoy over two decades of free electricity. 

Even better, government data shows that electricity prices consistently increase over time, making your free electricity even more valuable than it would be now. 

How to check your cash flow and returns from a solar loan 

Our solar panel calculator offers an easy way to check the projected cash flow from a solar loan, i.e. how the utility bill savings will stack up against your loan’s monthly payments. 

It only requires you to enter your address and the dollar value of your last monthly power bill and it does all the calculations from there.

It looks very simple at the front end but the calculator is actually very complex, taking into account your roof size and direction, local weather, local utility rates, tax credits, and other solar incentives to produce a very accurate result.

It calculates your solar loan monthly payment for the specific size of system your home needs, based on local prices in your area and a 4.99% APR, 20-year solar loan.

It also shows you utility bill savings over the lifetime of your panels, making it easy to see how the total savings will stack up against the total loan repayment.  

See what your projected cash flow and lifetime savings would if you used a solar loan to buy solar panels

How to find the best solar loan 

Follow these tips to make sure you get the best deal on a solar loan. 

  1. Opt for a secured loan like a home equity loan if you can – providing collateral will earn you a lower interest rate.
  2. Pay as much as you can as a down payment. This will lower the total amount of your loan, and less you’ll end up paying in interest.
  3. Aim for zero (or minimal) penalties for early repayment; the sooner you can pay your loans off, the higher your overall return.
  4. If you receive a tax refund thanks to the solar tax credit, use it to pay down your loans and thus reduce future loan payments.
  5. If maintaining positive cash flow is your priority, then aim for longer loan durations.
  6. If overall savings is what you want, go for the shortest loan period (and highest monthly repayment) that you can afford.
  7. Most importantly, shop around. There are more solar loan providers and options available than ever before, so it’s worth doing some research to find the best deal. 

You can read more tips on the Energy.gov website

Do you need a good credit score to get a solar loan? 

Not really. Plenty of banks will finance solar systems for the full spectrum of credit ratings.

Solar loan availability has expanded. thanks to the emergence of new solar loan platforms like Dividend Solar, Mosaic, and Greensky. They have enabled most local solar installation companies to offer zero-down financing to their clients.

For residents of California and Florida, there is also the option of residential PACE (R-PACE) loans. PACE loans have no credit score requirements at all. 

While not necessary, having a good credit score definitely has benefits. It will open more doors and allow you to negotiate on the interest rate. 

Are solar loans tax deductible? 

The answer depends on the kind of solar loan that is taken out. 

If the solar loan is secured by your home, then yes, all interest and fees on the loans are tax deductible. This is because home improvements such as solar installations are considered capital projects, i.e. those that increase the value of the house, are classified by the IRS as tax deductible. 

Solar loans that are unsecured, on the other hand, are not eligible for tax deductions.

A close up shot of Form 1040, used to file taxes

Solar loans secured by your home qualify for tax deductions. Image credit: The Verge  

What other types of solar financing are available 

Aside from solar loans, two other types of solar financing that you may come across are solar leases and Power Purchase Agreements (PPAs). Here’s a brief description of each:

  • Solar leases: You essentially rent a solar energy system and pay a monthly or annual fee to your solar installer.
  • PPAs: You pay on a cents-per-kilowatt hour (kWh) basis for the energy your solar panels produce. This is similar to a solar lease, just with different payment terms.

Solar leases and PPAs are what is known as third-party ownership models; this is where the solar company retains ownership of the solar panels and charges you for the power.

The big disadvantage with opting for solar leases and PPAs is that you won’t be eligible for generous solar incentives such as the solar tax credit. As such, these forms of financing have fallen out of favor and have been replaced by solar loans, which offers homeowners much better financial returns. 

If you’re interested, you can learn more about solar loans and PPAs here. 

Solar loans: Yea or nay?

For those who have the cash, first consider buying a solar panel system outright. A cash purchase offers the highest return on investment. 

However, most homeowners don’t have that sort of liquidity. For those individuals, we recommend exploring solar loans as a way to get solar panels with little or no upfront cash requirements.

Even after accounting for interest on the loan, homeowners can usually earn an excellent return on investment. They’ll also see many other benefits, such as increased property values, reduced reliance on the grid, and a small carbon footprint. 

As with all personal large financial decisions, be sure to shop around to make sure you are getting the deal that best suits your needs. 

An easy way to check if a solar loan is right for you is by using our solar calculator; it will show you how your monthly utility bill savings will compare with your loan’s monthly payments.  

Calculate how much you can save by using a solar loan to buy solar panels