The main thing that keeps people from adopting solar energy is the initial upfront cost. It’s for this reason that more homeowners do not embrace solar energy solutions for their properties.
Solar energy presents an enticing and secure long-term investment with promising returns. However, the upfront costs deter many individuals from taking advantage of it in the first place.
For instance, a standard residential solar system typically amounts to 5kW, carrying an average price tag of $14,550 based on data from EnergySage. Unfortunately, this amount is not readily available to most homeowners.
Fortunately, the Federal Tax Credit provides a 26% tax rebate for all residential photovoltaic (PV) system installations, effectively reducing the average cost to approximately $11,495. Nonetheless, paying over $10,000 upfront for solar panels remains unfeasible for a large portion of homeowners. This is where solar financing and solar loans enter the picture.
In this article, we will delve into the two primary solar financing options: solar loans and solar leases, and compare these two choices.
Just like a personal loan, a solar loan provides you with upfront funds to cover the entire cost of the solar panels (minus any down payment), which you then repay with interest over time through monthly installments.
Solar loans typically fall into two categories: secured and unsecured.
Secured loans are backed by the equity you hold in your home, requiring either a home equity loan or a home equity line of credit (HELOC). On the other hand, unsecured loans are traditional loans not tied to your equity or assets.
The key distinction lies in the level of risk faced by lenders. Secured loans carry lower interest rates due to the increased protection they have if you are unable to repay. However, it’s essential to understand both options.
Secured loans require you to secure the loan with the equity in your home, effectively creating a secondary mortgage based on your existing home equity. This enables lenders to offer lower interest rates, as they have stronger safeguards in case of non-repayment.
That said, failure to meet loan payments could potentially lead to foreclosure.
On the other hand, unsecured loans provide an alternative option that doesn’t involve leveraging your home equity to secure the loan. This means that there’s more inherent risk for lenders, resulting in a higher interest rate.
Unsecured loans typically span from 5 to 20 years, with interest rates ranging from 5.5% to 20% or even higher, contingent upon your credit score. However, unlike secured loans, unsecured solar loans generally entail higher fees.
PPA and Solar Lease
If you find it challenging to cover the upfront cost of purchasing a solar panel installation for your home, there are two viable alternatives aside from taking out a loan: opting for a solar lease or entering a Power Purchase Agreement (PPA).
In essence, both options share the same fundamental concept – you pay for utilizing a solar panel system without owning it.
The rates for both are computed based on the projected power output of the solar panels on your roof. The only difference lies in how these rates are determined.
PPAs assess rates in real-time, reflecting the actual energy production month by month, whereas solar leases predetermine a consistent monthly rate. Even though your solar panels might generate more energy during sunnier months, solar lease agreements accommodate this by factoring it into your monthly rate, essentially smoothing it out.
One noteworthy aspect of solar leases and PPAs is the presence of a “price escalator.” This refers to an annual increase in your monthly payments which affects either the electricity price in a PPA or the fixed monthly rate in a traditional lease.
Which is the Better Option
Your goal is to optimize long-term return on investment considering your present financial situation and willingness to take on short-term debt.
And with all things considered, a secured solar loan stands out as the most viable option in the long run. With a secured solar loan, you could potentially achieve a significant return on investment after repaying your solar loan.
On the other hand, a Power Purchase Agreement (PPA) only offered a much lesser ROI.