Solar financing: What’s the best way to pay for solar panels?

Home solar panels are more popular than ever, and for good reason: people can save tens of thousands of dollars over the next few decades by installing solar panels on their roofs.

Solar panels generate enough energy bill savings to pay back their initial cost within an average of 9 to 12 years, leading to many years of essentially free clean energy for their owner. For many people, an investment in solar power is a no-brainer compared to the cost of grid electricity.

The only problem is, how do you pay for them?

If you have the cash, you can use it. Or, you can choose solar panel financing. Let’s dig into the various financing options out there, which kind of person they’re best for, and how to maximize your profit while minimizing your costs.

How much do solar panels cost?

The cost of an average-sized home solar installation in the United States is between $18,000 and $20,000 before applying the federal solar tax credit and other solar incentives that may be available.

Solar panel cost is usually measured in “dollars per watt”, so you can easily compare prices between systems of different sizes. The average solar panel installation will work out to about $3 per watt.

Many factors will impact a system's cost, like the size, equipment used, and installer. No matter how you cut it, solar is a high-priced investment. Luckily, you can finance a solar installation in several ways.

Ways to pay for solar panels

There are several options when it comes to paying for home solar panels, each with its own set of pros and cons:

• Cash purchase

• Solar loans

• Solar leases/PPAs

Here’s a little bit more about each of the ways to pay for solar panels:

1. Cash

Cash purchase
Estimated upfront cost	$3.00 per watt
Estimated 25-year net savings	$30,000
Pros	Best installation price Best solar savings and return on investment Homeowners get incentives Increases home value Total control of the system No monthly solar payment or interest
Cons	Requires large sum of money upfront Need sufficient tax liability for full tax credit
Best for	Homeowners with the upfront cash on hand in areas with high electricity rates

Buying solar panels upfront with cash is the best way to go solar from a financial standpoint. Cash purchases give you the best return on investment, immediately increase your home’s value, and give you the most freedom.

Solar panels purchased with cash have the best solar savings because you don’t have to worry about paying interest, monthly payments, or additional fees that come with other types of financing. Purchasing solar panels with cash also ensures you get all of the solar incentives and rebates available in your area.

Benefits

• Best price: People who pay cash get the best price because there are no hidden fees or interest. 

• Best electric bill savings: Total savings over time will be much higher than a solar loan or lease.

• Incentives: As the system owner, you get to take advantage of all the incentives and rebates in your area. 

• Increases home value: Fully paid-for solar panels increase the value of a home.

Drawbacks

• Large amount of capital: Paying cash ties up a large sum of cash in a single investment.

• Sufficient tax liability needed: Homeowners need to be sure they have sufficient tax liability to benefit from incentives like the federal solar tax credit fully.

Who it’s right for

Paying cash for solar panels is an excellent idea for people with a good deal of savings who pay a fairly large federal tax every year. They can claim 30% of the costs to install solar panels on their next year’s tax return and start recouping the cost of their solar investment using energy bill savings from day one.

2. Solar loans

Solar loans
Estimated upfront cost	$4.30 per watt
Estimated 25-year net savings	$24,000
Pros	Convenient Homeowners get incentives Increases home value once paid off Substantial energy bill savings Pay fixed rate over time instead of upfront
Cons	Lower savings than cash purchase Recent interest rates hikes have increased cost Substantial dealer fees 30% 18-month balloon payment Difficult to sell home if loan isn’t paid off
Best for	Homeowners who don’t have upfront cash for purchase but want the best solar savings possible

When people talk about financing solar panels, they’re almost always talking about loans. Many financial institutions provide solar-specific loans designed to provide homeowners with long-term financing at reasonable interest rates.

You can get a solar loan through your solar installer. Solar installers work with solar financing providers to help homeowners secure financing, so you don’t have to worry about finding it all on your own.

However, these solar loans tend to come with pretty significant dealer fees that can add 20% or more to the principal of your loan. Because of the additional fee and interest rates, your lifetime solar savings aren’t as high as they would be with a cash purchase.

But that doesn’t mean going solar with a solar loan is a bad investment. Although your savings will be lower than if you had paid cash, you can still see a substantial return on investment and take advantage of solar incentives.

Benefits

• Convenience: You don’t have to shop around for financing options. Instead, you work with your installer and the financing options they have. 

• Incentives: You are the owner of the system when you use a loan, so you get to keep all the incentives and rebates.

• Fixed-rate over time: You don’t have to tie up a huge amount of money into an investment all at once, and you have predictable payments.

• Energy bill savings: You get to save on your electricity bills, with the savings covering most of the initial loan payments. And your savings increase over time because your loan payment remains the same while electricity prices go up. 

• Increase home value: Once the loan is paid off, you own the solar panel system free and clear, which can be great if you sell your home.

Drawbacks

• Lower monthly savings: Your loan payment will often be equal to or a bit less than what your electricity bill was before solar. This will make it seem like you’re not saving much, but once the loan is paid off, you’ve got free electricity! 

• Increasing interest rates: Because the Federal Reserve has repeatedly raised interest rates in the past couple of years, financing is currently relatively expensive, with high APRs and dealer fees.

• Balloon payment: Many lenders require the homeowner to pay up to 30% of the total cost within 18 months because the federal solar tax credit is worth 30%. If you don’t have the tax liability to take the full tax credit at that time, your loan payment may increase significantly after 18 months.

• Difficulty selling your home: It can be hard to sell a home with a solar panel loan that isn’t fully repaid. Buyers may want you to pay off the loan in full before they move forward.

Who it’s right for

Solar loans are ideal for people who plan to stay in their home for more than ten years, live in an area with high electricity costs, have decent-to-good credit, and don’t have the upfront cash to purchase solar panels all at once.

You’ll also want to ensure you have the tax liability to earn the full 30% tax credit before 18 months. Otherwise, you’ll have to shell out that money and recoup the tax credit over the following years or increase your loan payments.

That said, a loan can work for many different kinds of people. If you don’t have the cash to pay for the total cost of solar panels, get quotes from local installers and compare their offers to your current utility bills.

3. Leases/PPAs

Leases/PPAs
Estimated upfront cost	$0
Estimated 25-year net savings	$9,000
Pros	Don’t need big upfront payment Makes solar more accessible Electricity bill savings Production guarantees Homeowner doesn’t handle maintenance
Cons	Lowest solar savings Homeowners don’t get incentives Escalator clauses Difficult to sell home Often designed for company’s benefit
Best for	Homeowners who don’t have upfront cash for purchase, don’t have taxable income, or don’t qualify for a loan

Estimated upfront cost: Nothing

Estimated 25-year net savings: $9,000Solar leases and power purchase agreements (PPAs) are long-term agreements between a homeowner and a solar service provider.

Solar leases and power purchase agreements (PPAs) are long-term agreements between a homeowner and a solar service provider. Sometimes you'll see these financing options advertised as "free solar panels".

The service provider installs solar panels on the home’s roof and either leases the system to the homeowner for a flat monthly payment or sells the electricity produced by the system for a certain cost per kilowatt-hour. You can think of it as switching out your electricity bill with a lower-cost solar bill.

But be aware - your solar panels might not always cover all of your energy usage, so you may have to pay both a solar bill and a utility bill some months.  Plus, some utility fees can’t be covered by solar power.

These agreements typically last 20 to 25 years and include maintenance and a performance guarantee that promises that the system will generate at least a certain amount of energy. Because the company owns the system, they retain all the rebates and incentives - not you.

Benefits

• No upfront cost: You don’t have to pay a big sum of money.

• Makes solar accessible: Because you don’t need to pay upfront and don’t have to worry about qualifying for a loan, people across different income brackets can access solar when they otherwise couldn’t. 

• Save on electricity bill: The solar service provider essentially replaces most of your energy at a similar or lower price than the utility company.

• Production guarantees: Third-party ownership often comes with long-term production guarantees, labor and workmanship warranties, and maintenance.

Drawbacks

• Lowest electricity bill savings: Out of all the financing options, PPAs and leases have the lowest solar savings. 

• Homeowners don’t get incentives: Any solar incentives or rebates go to the solar company, not the homeowner, since the company owns the system. 

• Escalator clauses: Third-party contracts usually include an escalator that increases the payment each year by a certain percentage. If that percentage is higher than the rate at which electricity prices rise, you could actually end up paying more for solar. 

• Difficulties selling your home: Leases and PPAs can make it harder to sell a home because a prospective buyer may want to avoid taking on the remainder of the agreement.

• Not designed with homeowners in mind: Most solar leases and PPAs are designed to be more advantageous for the service provider than they are for the homeowner.

Who it’s right for

Third-party ownership can work well for homeowners who live in an area with very high electricity costs, plan to stay in their home for many years, and have little cash. It’s also a good option for homeowners who don’t have taxable income or who don’t qualify for a loan.

Be careful when signing up for a solar lease or PPA. Carefully examine the costs, escalator clauses, warranties, and maintenance agreements.

Bottom line: is it worth it to finance solar panels?

If you want to own your solar panels and don’t have about $20,000 in the bank, you’ll have to choose solar panel financing. As mentioned above, taking a loan to pay for solar panels can be a really good idea because the panels themselves generate energy bill savings that offset the cost of the loan payments.

Just make sure you understand everything you can about dealer fees, interest rates, and payment schedules. Be sure you can take advantage of the federal solar tax and know whether you’ll be required to pay its value toward the loan.

Speak with a trusted financial advisor to be sure you’re thinking things through. Thousands of people have used financing to get solar panels for their homes. You can become one of them as well, but be sure you understand all the important information about your solar before signing on the dotted line.