Image source: Getty Images.

SolarCity Corp (NASDAQ:SCTY.DL) has struggled to live up to its own expectations for most of the last year and it's showing in the company's stock price. The former market darling has lost nearly two-thirds of its value and investors are now wondering what its future looks like. A new loan product launched this quarter could tell us a lot about the future of residential solar and how SolarCity fits in that future.

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Saving customers more money

Solar leases, often known by their other name "power purchase agreements", both terms describing an arrangement where a customer pays for solar energy over the course of 20 years or more, have been the dominant financing method in residential solar over the past five years, but that may be ending. Solar loans, where the customer actually buys solar panels with a loan, provide a lot of benefits that leases can't.  

Image source: SolarCity.

They don't like advertising it, but SolarCity and Vivint Solar (NYSE:VSLR) normally charge increasing prices over time, meaning over the course of 20 years the cost of a kWh of energy could nearly double. If electricity prices don't rise at the same rate or faster the cost of solar could be underwater by the end of the contract.

On the ownership front, a solar system financed with a loan is an asset that can add value to the home when it's sold. A lease is a liability that solar companies are asking homeowners to transfer to the next homeowner, not an asset.

It's also very likely that loans will be cheaper for the vast majority of homeowners. SolarCity's loan product comes with an interest rate of 2.99%, which is lower than SolarCity's borrowing costs for the leases it owns. As long as the initial system is priced competitively, the loan should save customers money versus a lease.  

A huge financial boost for SolarCity

There's also an immediate benefit for SolarCity. The new loan product isn't financed by SolarCity itself, so it'll appear as immediate revenue and margin. Leases only generate revenue when customers pay their monthly bill, so a system generates a much smaller amount of revenue annually over the course of 20 or more years.

There's also less financial obligation long-term for SolarCity versus a lease, which the company finances over the life of the system. With nearly $5 billion in solar energy system assets on the balance sheet there's a lot of interest rate risk from leases in the business.  

The one thing that will define SolarCity's future in solar loans

Solar loans could save customers money, expand SolarCity's market, make the company profitable, and simplify its balance sheet. But the company has to offer competitive prices to win customers because it's easier to compare the price and interest rate of solar systems bought with a loan than it is the underlying cost of a lease. If SolarCity can price systems competitively it could maintain market share, but if it tries to generate high margins, as it did with the defunct MyPower loan product, it could be undercut by competitors. How SolarCity handles pricing will be telling, so it's worth keeping an eye on as 2016 unfolds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.