Solar energy financing is an integral part of the installation process. Although we don’t provide solar funding, we work with different financial institutions to help you go solar. Because solar installation requires a considerable amount of financial resources, some homeowners and business owners consider leases, power purchase agreements, and loans.
Cash financing is also common if you want to avoid interest rates and monthly deductions. There is no best option, but each works well under different circumstances. More so, solar loans come at lower interest rates than ordinary loans. However, there are minimum qualifications you should meet to qualify for solar financing. Some conditions, like credit score, can disqualify some applicants.
Types of Solar Financing
a) Solar Leasing
If you go for this solar financing option, the system belongs to the leasing company. That is until you are through with paying for it over the lease term. This lease option differs from others, such as car leasing. It is possible to lease the car to someone else but not easy to remove the solar power system and lease to another homeowner.
If you wish to sell your building, you will have to clear any outstanding loan balance. The leasing contract is not transferrable to a new property owner. In this option, you only pay a simple monthly fee to the solar leasing company and an amount that is usually below your current electricity costs.
Theoretically, the homeowner in this option comes out ahead. However, you should be aware of the real interest rates chipped into the monthly lease. If possible, compare the solar system’s cost when you purchase it in cash and the total cost that you incur over the lease period.
Most of the time, the amount you pay for the solar leasing company could be more than double the cost you would incur in purchasing the system with your cash. The difference comes in the interests you incur to benefit from the solar system currently while paying later. The low monthly payments, which are part of the solar system’s energy savings, should not fool you.
This solar financing option is recommendable for large solar projects such as installations common in commercial premises. Make a comparison between the total costs for all options available. Sometimes, repaying a long term solar project loan could be as low as lease payments.
The benefit of solar leasing as a financing option is that lenders take up responsibilities such as maintaining the system. Therefore, you have peace of mind, mainly if you leave your home for an extended period, such as a vacation.
b) Cash Payment
This option is ideally not financing. However, this conventional mode of buying items with cash is important to have on the list compared to other solar financing options. If you don’t have a debt and have the lump sum amount of money, you can use it to finance your solar project.
The tax-free return from solar systems is more than the current interest rates from banks and government bonds. If you consume more power during the day, an investment of 6,500 dollars on a 6.6 kW solar system project can give you a payback in an average of five years. If you do the math, you realize that the rate of return is 12% per year.
That is way higher than the interest rates you would get if you left your money in the bank. The return may be lower than that if you don’t consume more electricity during the day. However, it is still way above the interest rates you can get from the bank.
Solar financing using cash is ideal for homeowners or businesses with savings that are lying idle. Take, for instance, retirees who have no debts and have a higher return on their money with low risk.
c) Power Purchase Agreements (PPAs)
PPA’s main idea is to have your solar project installation at no upfront cost, and then you pay the company for the solar energy that the system produces. Take, for example, a solar company that charges kilowatt-hour of generated electricity at 20c, unlike a typical grid system whereby you could pay 30c for the same amount.
While this solar financing option sounds impressive, it has a downside. Under this system, the contract obligates you to purchase a specific minimum amount of energy, whether you need it or not. Therefore, at times you might find yourself paying for what you don’t require.
This option is popular among commercial enterprises and industries where there is a lot of electricity consumption during the day. In such a case, the premises can consume the minimum targets throughout. Therefore, it is recommendable to consider this solar energy financing option only if you have a factory or commercial premises. Additionally, it should use a significant amount of electricity during the day and run throughout the week. It is the only way you can avoid paying for power that you don’t need.
d) Home Mortgage
If you consider a 12% return from a solar project, you realize that additional borrowing as a way of solar financing is better than reducing the mortgage. However, this option has its challenges. When people use a home loan in solar energy financing, they tend to make minimum repayments.
In case you plan to clear the mortgage in 25 years, then the solar project could end up being double when you consider interest over time. Be sure to weigh between the total cost of mortgage and short term loan on solar before you settle on any. Be cautious on variation fees and any effect it could bring to the lender’s mortgage insurance.
This solar financing option is suitable for homeowners who have the financial discipline to make quick payments on their mortgage. You can avoid the substantial fees that are part of a new loan if there is an offset facility in your mortgage. With it, you include the cost of a solar project to your mortgage, and you won’t incur the fees. If you choose this solar financing option, it is essential to pay above the minimum repayment sum with your solar energy savings. That way, you can pay the mortgage faster.
e) Personal Loan
Another solar financing option is to seek assistance from a finance company. It is essential for those who cannot borrow more on their home loan. Additionally, it helps those who want the extra incentive of a higher interest rate to ensure they pay their loans on time to avoid accumulation.
A personal loan works well for a person who does not have the financial discipline to pay above the minimum repayment amounts. That is despite its higher rates of interest. This solar energy financing option has similarities to the green loans in that there are lenders who factor in aspects such as the purpose of the loan and ownership status of the home, among others.
Additionally, some lenders could offer better interest rates than those available in the market. The lending company pre-approves the loan and gives you a chance to bargain as a cash buyer. It also ensures that you go for the best system.
If you want to sell the property, there is no impact on the loan since you guarantee it, and it has no connection to the house. The use of personal loans as a solar financing option is great for people with good credit score. Besides, there is a competitive interest rate and bargaining power of a person buying with cash.
f) Green Loans
There are financial institutions that are committed to assist the community conserve environment. They offer personal loans at low rates. Mostly, the interest rates for green loans resemble a home loan as long as you use the money for solar financing.
Additionally, it can also be for other energy-saving reasons, such as setting up an efficient air conditioning system. It is upon you to decide whether you will pay in 1-7 years with early repayment penalization or reduce setup and reduced to zero ongoing fees. People who don’t want to spend cash have green personal loans as their next best option for solar energy financing.
Like a mortgage, a new setup on a green loan attracts some fees. You must be keen on the monthly, establishment, and early repayment fees that can substantially impact the system’s total cost.
If you are keen, you can come across a more friendly green loan option. That is an option where the interest rate is low, zero early repayment and ongoing fees, and low upfront fees. Green loans are a great solar financing option, especially if you have good credit history.
The cost of solar systems varies with technology. Although older technology may be cheaper than the newer ones, it generates less energy for your home. You should do cost analysis before settling on any option. However, you don’t have to go for older technology simply because that is what you can afford. The above solar financing options help you install an ideal solar system even if you are on a tight budget.