What’s The Best Solar Loan?
Solar Financing can be so attractive that it’s often the deal maker or breaker when picking a company. Cash, of course, is king, and you usually get the best pricing when paying cash. The return on investment varies for cash, but is 5-8 years on average depending on how high your utility bill is. Solar financing and loan options, however, have become extremely competitive. The return on investment is incalculable when you put no money down and the payment is less than or equal to your current utility cost. In essence, you’re replacing a recurring bill with an asset. Plus your electric bill adds no value to your home, while the solar system increases your home’s value.
Financing: Rates and Terms + Fees
There are many financing options available for solar these days, with varying rates, terms, and fees. The lowest interest rates have buy-down fees, and the fees vary by lender. Credit union solar loans tend to have the lowest fees, and solar-specific lenders usually have the highest fees. Most of the fees are also subject to the 26% tax credit, and that helps reduce the cost of buying down interest rates, which makes them attractive over time.
Signature Loans
Most solar loans are signature loans, with no lien on the house except for a UCC filing, which is a lien against the solar equipment on the home. It grants the lender the right to remove the solar if the loan goes unpaid. The interest on these loans is not tax-deductible. Terms vary from 8-20 years in most cases, with rates from 2.99% to 7.99% or higher for less qualified buyers. The majority of these loans are only available through your solar contractor.
Re-amortization for the Tax Credit
Solar finance companies design solar loans with the tax credit in mind. They offer two different types of solar loans. Combo loans start with the assumption that you will roll your tax credit into the loan within 12-18 months. The principal balance starts with the net price of the solar (Cost minus tax credit) and they start with a low payment because of that. If you send in the tax credit in the allotted time, then your monthly payment remains low. If not, no problem or penalty, but your payment adjusts to compensate for the bigger balance owed. After the re-amortization period ends, any additional principal paid reduces the term remaining on the loan, just like a mortgage.
Get Lower Fees Without the Combo
The other type of loan is very similar to a combo loan, but without the lower monthly payment for the first 12-18 months. In other words, the loan payment is based on the entire solar amount, not the amount minus the tax credit. Fees and interest rates tend to be lower on these loans because they aren’t giving you advanced credit for the tax payment. If you do send in your tax credit or part of it during the allotted period, your loan will adjust downwards. If you keep the tax credit, the loan stays the same. These loans have lower fees than the combo loans do, usually.
Solar Loan Terms and Rates
The most popular option is the 12 year, 2.99% loan, chosen by borrowers for its short term and low rate. It typically has the highest dealer fees but costs less in the long run than no-fee loans as long as you don’t pay off the loan early. Generally speaking, if you plan to pay down your solar loan, don’t pay fees for a low-interest rate loan. Paying fees for the lower rate only makes sense if you ride the loan out to term.
For cash flow, the 20 year, 5.99% loan is very popular as it replaces the utility bill with a much lower monthly payment. Over time you will pay more interest, but still are buying an asset rather than sending your money to the utility company endlessly. Plus the payment is fixed, there are no rate hikes.
Assessment Loans: Tax Lien Loans (PACE)
Another type of loan is PACE financing, which is a tax lien on your property, that is due with your property taxes. Interest is tax-deductible in most cases, and you don’t need good credit to qualify, but you do need at least 10% equity in your home, and income to pay for the loan. A popular benefit of this loan is that it doesn’t appear on your credit report or hurt your debt to income ratio. Often the first payment is delayed for several months because it’s not due until the new tax bills are sent in November. So if you sign for the solar in July, because the tax rolls close in June for the following year, you won’t owe a payment for well over a year.
PACE: Proceed with Caution
The downside to PACE loans are well documented, and many safeguards have been put into place to protect borrowers. Because it is secured with your home, you run the risk of losing your home if you don’t pay the tax lien. There are also administrative fees included in your payments. Also, PACE is not available in all communities. If you plan to refinance, a PACE loan could slow down the process. It is, however, a great option for those with poor credit, or high debt to income, or just don’t want the loan attached to them but rather to the home since that’s what the solar is physically attached to.
Financing And The Solar Tax Credit
One of the biggest perks of buying solar is that you will get a tax credit equal to 26% of the cost of going solar in 2020. In 2021, the residential solar tax credit will be 22%, and then it will end in 2022 unless legislation changes. The tax credit is a dollar for dollar reduction in taxes owed, but you must owe taxes to receive it. If you have little or no taxable income, you won’t get the tax credit back from the IRS and should consider a lease or Power Purchase Agreement to cut your utility costs.
However, if Federal taxes are withheld from your paycheck, and you only get a portion of it back, expect a refund after going solar. If you usually write a check to the IRS, the tax credit serves as a payment. The unused portion of the credit can be rolled over year after year until it’s used up. The Solar Guide suggests that you consult with your accountant on tax matters.
But I Always Get A Refund
Just because you got a refund doesn’t mean you didn’t pay taxes. The amount of Federal taxes withheld minus your refund is how much taxes you paid. This is how much you can claim of the solar tax credit. If you owe little or no taxes, then consider a lease or PPA. Check out our Guide to Solar Leases and PPA’s