Are Solar Loans a Rip Off?

Loans are the single most popular method for going solar. Despite their popularity, choosing a loan option is often the least enjoyable part of the solar process. There are a variety of different loan types, terms, and options- many of them being exorbitantly expensive, which can turn homeowners off to the idea of solar altogether. Fortunately, calculating the total cost of financing per year enables loan options with different terms, structures, rates, and fees to be compared apples-to-apples, clarifying which deals are the best.

Historically, most homeowners looking to finance big house projects would do so through a home-equity loan or a cash-out refinance. Home-equity loans are lump-sum loans collateralized with a home’s existing equity and paid through regular installments. A cash-out refinance is when a home is remortgaged, with a portion of the money paying off the existing mortgage and a portion of the money going to the homeowner to use as they please. Cash-out refinances can be a great option for replacing a mortgage that has an above-market interest rate and a long remaining life. There are other options such as personal loans, home improvement loans and credit cards loans, but these all have much higher costs.

Solar loans are a newer, more-popular options for financing solar systems. They are usually secured against the home or the solar system itself. Solar loans are normally re-amortized 12-18 months after they start so that homeowners have the option to apply the solar investment tax credit (ITC) towards the loan. The payments will remain the same if the ITC is applied and will increase if it is not. Solar loans with the lowest cost of financing are structured to take maximum advantage of the ITC by having high fees (technically cash discount removals) and low interest rates. These fees are baked into the loans, which almost never require any money down.

The main implication of a high-fee, low-interest loan is that most of the cost of financing is borne upfront rather than accrued overtime. The result is that longer-term loans actually have more competitive financing rates than shorter term loans and paying these loans off early increases the relative cost of financing even though there are no pre-payment penalties. To illustrate this point, we used the payment figures for popular solar loans to calculate what the equivalent rate would be if there were no fees. We did this both in the scenario where the borrower volunteers to pay back the ITC, “With PMT” and where the borrow elects to keep the ITC “No PMT”.

Table 1: Solar Loan Options

Table 1 does an excellent job of demonstrating the three most important takeaways for borrowers considering a solar loan: 1) High-fee loans with low rates offer the best value, 2) Keeping the ITC reduces the relative cost of financing, and 3) Longer-term loans have a lower relative cost of financing then shorter-term loans. That still leaves open the question of how solar loans stack up to traditional financing options. To determine this, we took the most competitive solar loan options from Table 1 and compared them to the benchmark rates for home equity loans and mortgage refinancing options from BankRate.com.

Table 2: Options for Multiple Loan Types | Source BankRate.com

As you can see, solar loans and remortgages are neck and neck for longer terms while remortgages are more competitive for a medium-term loan. When deciding between the two options there are three important things to consider:

1. Is there enough equity in the house for purchasing a solar system? If the house was recently purchased, there likely is not which makes a solar loan a more viable option.
2. Is my current mortgage rate above market? If so, homeowners are best off doing a cash-out refinance which will simultaneously improve their mortgage rate and fund their solar system purchase.
3. Which option is easier? Solar loans involve considerably less paperwork and shopping around than remortgages. Most customers leaning towards longer-term loans will opt for a solar loan which has a similar cost of financing with higher approval rates and less headache.

The last thing homeowners will want to consider is how much they are saving with solar after including the cost of financing. This can be done by checking the levelized cost of energy (LCOE) from their utility versus from a solar system. It is a project-specific metric involving current utility cost, system orientation and system slope, among other things. Customers looking to see how their solar LCOE figures stack up to what they are currently paying can do so by submitting an online quote request. These figures can be found on the fourth page of your proposal