Solar Panel Financing: Here’s What You Need to Know

Solar panels are one of the fastest ways to add value to your home while saving money.

Solar panels collect the sun's energy and convert it into electricity. There are two primary reasons homeowners install solar panels: They can cut electricity bills and help combat greenhouse gasses.

Financing solar panels can be a great way to decrease your eco footprint. Here, we will dive a little more into how to finance solar panels: costs of a solar installation, types of solar loans, and choosing the best financing option for you.

What is a solar panel loan?

Solar panel financing is designed to help homeowners come up with the funds they need to purchase a solar panel system. Loans for solar panels allow homeowners to pay off the cost of a solar panel installation over the course of several years, rather than paying out-of-pocket.

Solar panels can save the typical American family over $1,400 in electrical costs each year, according to solar panel website SolarReviews.com. Homeowners can make significant savings, but there's a fairly hefty upfront cost -- which is where a solar loan can be helpful. Solar site EnergySage puts solar installation cost for an average-sized home in the U.S. between $11,144 and $14,696. This amount is after solar tax credits, which we will discuss later in this piece.

Looking for solar loan rates?

If you're ready to finance solar panels, you can compare rates today with our list of best personal loans. On that page, you can also compare credit score requirements, loan sizes, and terms from our experts' favorite personal loan lenders.

If you're looking for a solar loan, a personal loan may be your best bet. Personal loans come in all shapes and sizes, and often offer low interest rates and attractive terms to borrowers with high credit scores.

Most personal loans are unsecured, meaning you don't have to put up collateral for the loan. While the interest rate may be a bit higher on a personal loan than a home equity loan, you don't risk losing your property if life goes sideways and you miss payments.

What credit score do I need to get a personal loan for solar panels?

The best credit score for a personal loan depends on the lender. In general, you'll need a credit score of at least 550 to get approved. Borrowers with high credit scores tend to get the best rates and repayment terms.

If you can delay your solar panel installation a few months, consider taking the time to improve your credit score: Browse your credit report for mistakes, pay off high-interest debt (like credit card debt), and build a positive payment history by paying bills on-time.

If you have a bad credit score, but you're sure you want to finance solar panels right now, start by applying to personal loans for bad credit. This will minimize the chances of getting denied for a loan because of your credit score. Make sure you can confidently make the monthly payments on the loan you choose, or you'll bring your credit score down even more.

On the other hand, if you have excellent credit, you'll qualify for personal loans with extremely competitive interest rates. A low interest rate can save you hundreds of dollars over the life of the loan -- even a 1% difference can result in major savings. If that's your situation, keep an eye out for the best low-interest personal loans to maximize your savings.

Other loans for solar panel financing

Personal loans aren't the only way to finance solar panels. Here are some other options:

Government loan

You may hear about a program through the Federal Housing Administration (FHA) called PowerSaver, designed to help homeowners finance energy saving home upgrades by providing loans for a long list of technologies, including solar panels. There are two options in this program offering a large enough loan to fully finance solar panels: PowerSaver Second Mortgage or the PowerSaver Energy Rehab, 203(k) Loan. Borrowers will need to meet certain qualification requirements, such as a minimum credit score of 660 and a debt-to-income ratio of 45%, to qualify for this type of solar financing.

The PowerSaver Second Mortgage allows homeowners to take out a second mortgage of up to $25,000 to increase energy efficiency through the installation of solar panels. To qualify for this program, homeowners cannot have an existing home equity loan, second lien, or second mortgage. Those who do take part have up to 20 years to repay the loan.
The 203(k) loan is for anyone buying or refinancing a home who would like to roll the price of upgrades into the new loan. They have the entire length of the mortgage to repay the debt.

Some people like these programs because the interest rate is in keeping with personal loan interest rates, but the repayment term is more than twice as long. And because FHA keeps a tight rein on what you spend, you are likely to stay in budget and purchase only what's needed

However, FHA financing limits apply -- meaning you must stay under their spending threshold. If you finance solar panels for 20 years, you may need to replace solar components before the loan is paid in full. It can be tough to find a lender experienced with either of these programs, and FHA rules must be followed to the letter, a challenge that can slow the process to a crawl.

Home equity loan

A home equity loan allows you to borrow money from the equity in your home to finance the solar panels. Typically, a bank will lend up to 85% of the equity in your house for a project like this. For example, if your home is worth $300,000, but you only owe $200,000, you have $100,000 in equity. That means the bank will consider you for a loan of up to $85,000. Because your property serves as collateral, you are likely to snag a decent interest rate with a home equity loan for solar panels. But, that also means the bank has the right to repossess it if you fail to make payments on the loan.

Solar leasing

This technically doesn't involve purchasing your own solar panels. Instead, this program allows you to lease ("rent") solar panels. The appeal is that solar panel companies often offer lease programs with no money down. The company installs the panels and you immediately enjoy the energy savings. However, you do not receive tax credits and will never own the panels outright.

What to look for when financing solar panels

When deciding how to finance solar panels, you may be nudged toward one type of lender or another. Do not rush into a solar loan. If you decide to move forward with the purchase, let your salesperson know that you plan to rate shop first. A difference of as little as 1% in interest can save you (or cost you) thousands over the life of your solar loan.

Here's what to look for when you're financing solar:

A low interest rate. The less you pay for the loan, the faster solar panels pay for themselves through energy savings.
Attractive repayment terms. Like Goldilocks, you're looking for "just right" when it comes to repayment terms. If the repayment term is too short, your monthly payments may be too high. If the term is too long, you will end up paying more in interest than you need to. You want to find the shortest loan term you can comfortably afford to pay.
Perks. The best solar power financing perks include a discounted interest rate for auto-pay, easy online access to your loan information, and unemployment protection.

Is solar panel financing right for me?

Once you've signed on the dotted line for solar power financing, you can take advantage of a federal tax credit. Depending upon where you live, you may also be eligible for state and local tax incentives.

The federal solar tax credit, sometimes referred to as the investment tax credit (ITC), allows you to deduct 26% of the cost of your solar energy system from your federal taxes. This incentive will step down to 22% in 2021 and expire for all residential installations in 2022. But, if you install a $12,000 system this year, your federal tax credit will be $3,120 ($12,000 x 0.26 = $3,120).

Financing a purchase is a big decision. To work out whether a solar loan is the right decision, take a close look at your monthly budget and the amount you will save against the total costs. Put pencil to paper and figure the real cost of the loan, factoring in the tax credit(s), and lower utility costs.

There aren't many home improvement projects out there that help protect the environment, reduce dependence on fossil fuels, lower the cost of living in your home, and immediately raise the value of your property. Solar power financing is definitely worth considering.

How to Finance Solar Panels