Solar financing: How do you pay for solar?
Last updated 4/4/2023
There’s a reason why 2.5 million homeowners–and counting–have already gone through the solar installation process in the US: it’s a great investment and will increase your home’s value! In addition to allowing you to tap into clean energy, Ssolar panel systems last for 25 years or more, offsetting most or all of your electricity bill every month. Those monthly savings add up quickly: if you spend $150 per month on electricity today, you’ll spend over $65,000 on electricity in the next 25 years. By investing in solar, you can avoid most or all of that future spending on electricity. As with any home improvement or upgrade project, before you install solar panels, it is important to make sure you consider all of the options available to you and what best suits your needs.
Solar panel financing is the option for homeowners to use instruments like loans and leases to come up with the funds needed to purchase a solar system by paying in installments or monthly payments over time instead of out-of-pocket upfront at the time of purchase.
Long-term electricity costs based on monthly bills
|Electricity spending||10 year cost||15 year cost||20 year cost||25 year cost|
|$50 monthly bill||$6,900||$11,200||$16,100||$21,900|
|$100 monthly bill||$13,800||$22,300||$32,200||$43,800|
|$150 monthly bill||$20,600||$33,500||$48,400||$65,600|
|$200 monthly bill||$27,500||$44,600||$64,500||$87,500|
|$250 monthly bill||$34,400||$55,800||$80,600||$109,400|
But solar isn’t free - to benefit from solar savings, you have to first pay for your solar panel system and tap into renewable energy. A typical solar panel system will be costs around $25,000 on EnergySage not including installation costs. Thankfully, there are a number of different ways to pay for your solar panel system and alleviate high upfront costs, each with their own pros and cons such as total costs, repayment terms, and incentives.
Solar financing options
There are three primary ways to pay for solar: with a cash purchase, with a solar loan, or with a solar lease/power purchase agreement.
There are two ways to pay for a solar panel system that you own outright: an upfront, cash payment and a solar loan. A cash purchase of a solar panel system is the best way to maximize your savings from solar. Think of it this way: if your solar panel system is designed to produce 100% of your electricity needs, then if you purchase your solar energy system upfront you’ve just paid for 25 years’ worth of electricity. Pretty cool! You’re insulated from any future electricity rate increases and you’ll receive all of the financial incentives and rebates associated with going solar. Overall, this means you’re likely to see a better return on your investment from solar than if you were to put that money into the market.
At the same time, the one clear drawback of a cash purchase is that solar isn’t cheap. If you want to purchase your system in cash, you’ll need to have enough capital on hand to pay for the system, which can set you back typically anywhere between $20,000 to $30,000.
The second main way to own a solar panel system is with a solar loan.
Solar panel loans are a wonderful financing option for solar power systems because they allow you to go solar and own the system with no down payment , and often at a lower cost than what you pay for electricity at the moment (especially if you have good credit). In other words, solar loans make it so that if you can afford your monthly utility bill, you can afford to put solar on your roof. Not too shabby!
If you choose to go with a personal loan, you will most likely have fixed rates of interest and no origination fees. Other types of loans may have variable loan payment options. These are a type of unsecured loan that doesn’t require collateral There are also many energy efficiency and home improvement loans available, as well as tax deductible options. With solar loans, if you have excellent credit, rates can be even lower. Solar loans may seem similar to a solar lease or PPA, but there’s one key difference which has two major implications: with a solar loan, you own the system, whereas with a solar lease/PPA, a third party owns the system. This means that with a solar loan, you’re eligible to receive any rebates and incentives for the solar panel system, but you’ll also be responsible for any future maintenance so it’s important to take note of the warranty that may come with the solar equipment.
One type of solar loan to consider for a solar panel installation project is a home equity loan or home equity line of credit (HELOC). These are secured loans. Similar to refinancing, these loans are good for borrowers with lots of equity in their home who are willing to borrow against it as you would a credit card. They have fixed interest rates and the ability to deduct interest but are only best for a small subset of lenders and have a long application process as is true with those who choose to refinance their mortgage.
As with any financial instrument, it is important to pay close attention to the loan options available to you. It is best to choose a loan amount that is as close as possible to the amount you need, has low interest rates and a loan term that is reasonable for you.
Solar leases and PPAs
Though they’ve declined in popularity in recent years, solar leases and power purchase agreements (PPAs) played a huge role in the growth of the solar industry in its infancy. Solar leases and PPAs work very similarly, which is why they’re often lumped together: they are both a method of third party ownership (TPO), where that third party owner installs solar panels at your property and then sells you the electricity produced by the solar panels at a predetermined rate. There are subtle differences in how leases and PPAs work, but they’re similar enough that it’s easier to keep them together.
With a lease/PPA, you’ll typically lock in a set rate for electricity for the next 25 years according to the U.S. Department of Energy, about 10 to 30 percent below the rate you currently pay for electricity. Historically, leases and PPAs built in an escalator to your payments, meaning that each year you would pay more for your solar than you did the year prior, but recently, the trend has been for leases/PPAs locked in at a specific rate for the entire contract period. What’s more, with a lease/PPA, the third party owner is responsible for monitoring the system and any maintenance on it, meaning there’s always somebody looking out for the well-being of your solar panel system.
Because you don’t own the solar panel system in a lease/PPA set up, you won’t be eligible to receive any of the financial incentives and rebates associated with solar; rather, the company that owns the system will be. Additionally, while homes with solar sell for 3-4 percent more than similar homes without solar, that’s not always the case with a lease/PPA, since you as the owner of your home aren’t technically the owner of the solar.
Note: third-party ownership isn’t available in every state. Here’s DSIRE’s map of states that allow for solar leases and PPAs.
Tax benefits and rebates for solar panels
There are many rebates and incentives available as well to help homeowners pay for solar panels. The strongest of these is the federal solar tax credit which allows people to deduct 30 percent of the cost of installing a solar panel system from your federal income tax. The tax will stay at 30 percent until 2033, after which it will drop to 26 percent. There is no cap on the value of the eligible system.
Depending on where you live, there also may be different local utility company and state-level incentives available. The friendliest states for solar tax incentives are: New York, Rhode Island, Iowa, Connecticut, and Maryland. You can read more about these local incentives here.
Cash vs. Loan vs. Lease comparison for solar
A cash purchase is right for you if:
- You’re looking to maximize your savings from solar;
- You have enough tax liability to take advantage of the solar investment tax credit (ITC);
- Or you have the funds available to pay for a solar panel system upfront.
A solar loan is right for you if:
- You don’t want to shell out the amount of cash required to pay for a solar panel system upfront;
- But you still want the most savings on your electricity bills as possible;
- And you would like to be eligible for all incentives and rebates.
A solar lease/PPA is right for you if:
- You would prefer someone else to monitor and maintain the system;
- You aren’t eligible for tax incentives;
- Or you’d just like to reduce and/or lock-in your monthly electricity bill.
Compare your financing options on EnergySage
The easiest way to compare the pros and cons of different financing options is to drop your address into the free-to-use EnergySage Solar Calculator: we run the numbers for you to see how much you can save with a cash purchase, solar loan, and a lease/PPA (if it’s available where you live). To see these differences in action, sign up for a free account on EnergySage to receive custom solar quotes from local solar companies with different financing options included.
EnergySage is the nation's online solar marketplace: when you sign up for a free account, we connect you with solar companies in your area, who compete for your business with custom solar quotes tailored to fit your needs. Over 10 million people come to EnergySage each year to learn about, shop for and invest in solar. Sign up for the EnergySage Marketplace today to see how much solar can save you.