Solar financing: what’s the best way to pay for solar panels?
Updated
Solar panels can save you money, but how should you pay?
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 roof.
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.
Solar panel 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. The average installation can produce about 6 kilowatts (kW) of instantaneous DC power generation or about fifteen 400-watt solar panels.
The standard measurement used for cost in the solar industry is dollars per watt. The 6-kW system described above at a total price of $18,000 costs $3 per watt. When comparing solar cost and savings estimates from different installers, divide the total cost by the system size to determine the cost per watt.
The cost-per-watt of solar panels varies based on a few factors. The most important is system size. As size goes up, the cost per watt tends to decrease. Here’s a quick rundown of the average cost of various system sizes:
| System size | Number of solar panels* | Average cost per watt | Average total cost (after tax credit) |
|---|---|---|---|
| 4 kW | 10 | $3.25 | $9,100 |
| 6 kW | 15 | $2.95 | $12,390 |
| 8 kW | 20 | $2.85 | $15,960 |
| 10 kW | 25 | $2.75 | $19,180 |
| 12 kW | 30 | $2.75 | $23,100 |
| 14 kW | 35 | $2.60 | $26,936 |
| 16 kW | 40 | $2.60 | $29,860 |
*Based on 400-watt panels
Other factors include the state where you live (labor cost and other overhead changes based on the market), the type of roofing material on your home, and the available incentives in your area.
For more detail, check out our full article about the cost of solar panels.
Ways to pay for solar panels
If you’re looking to get solar panels for your home, there are several options when it comes to paying for the investment:
- If you have the cash, you can choose to use it, taking advantage of all available solar incentives and earning a good return on your investment.
- If you don’t have the cash but still want to get the benefits of solar ownership, you can choose to pay with a loan. Available ways to finance solar panels include solar-specific loans, home equity loans, and personal loans.
- Finally, there’s third-party ownership. That’s when a solar company installs panels on your roof and either leases them to you for a flat fee or sells you the solar energy.
Here’s a little bit more about each of the ways to pay for solar panels:
Cash
Paying cash is the simplest way to get solar panels, and it still provides homeowners with the best return on investment, an immediate increase in home value, and the most freedom. It gives people peace of mind knowing their electricity needs will be met for many years.
Over time, solar panels can help save tens of thousands of dollars in energy costs, and when you pay cash, it reduces your total monthly expenses for at least 25 years (the length of most solar panel warranties).
Benefits
- People who pay cash get the best price, free from any solar loan origination or dealer fees.
- Paying cash gives you total control over what happens to your solar panel installation.
- Fully paid-for solar panels increase the value of a home.
- Total savings over time will be much higher than a solar loan or lease.
Drawbacks
- Paying cash ties up a large amount of capital in a single investment.
- Homeowners need to be sure they have sufficient tax liability to fully benefit from incentives like the federal solar tax credit.
Who it’s right for
Paying cash for solar panels can be an excellent idea for people who have a good deal of savings and pay a fairly large amount of 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 1.
Loans
When people talk about financing solar panels, they’re talking about loans. There are many ways to use a loan to pay for solar panels.
Many financial institutions now provide solar-specific loans designed to provide homeowners with long-term financing at reasonable interest rates. Most of these loans require no down payment and are unsecured, meaning they don’t require collateral or home equity to get started.
Most solar loans are available to borrowers with credit scores of 680 or higher, but there is an increasing number of loan options for people who don’t have great credit.
There are also alternatives to solar loans, like a home equity line of credit (HELOC), home improvement loan, or PACE loan. These come with various interest rates and requirements for collateral and creditworthiness. Credit unions offer better terms but have more stringent requirements.
Benefits
- Taking a loan means you can take advantage of all the tax credits, rebates, and other incentives available to people who purchase solar panels.
- Solar loans offer a fixed rate and allow you to pay over time, meaning you don’t have to tie up a lot of money into an investment.
- The energy bill savings from your solar panels cover all or most of the initial loan payments, and savings increase over time because the loan payments stay the same while electricity prices go up.
- Once the loan is paid off, you own the solar panel system free and clear, which can be great if you sell your home.
- Loans allow you to save money now and roll the remaining principal into a home refinance at some time in the future.
Drawbacks
- Paying for solar with a loan means you swap a portion of your electricity bills for solar loan payments, and the monthly savings from a loan are often quite small (although they vary widely based on your cost of electricity).
- Because the Federal Reserve has repeatedly raised interest rates in the past couple of years, financing is currently relatively expensive, with high APRs and loan origination fees (aka dealer fees).
- Many lenders require the homeowner to pay up to 30% of the total cost within 18 months, based on the fact that the federal solar tax credit is worth 30%. If you don’t have the tax liability to take the full tax credit, your loan payment may go up by a lot after 18 months.
- It can be harder to sell a home with a solar panel loan in repayment.
Who it’s right for
Solar loans are ideal for people who plan to stay in their home for 10 or more years, live in an area with high electricity costs, and have decent-to-good credit and a good deal of income (and therefore an annual tax burden that allows them to claim the full 30% tax credit).
That said, a loan can work for many different kinds of people. If you don’t have the cash to pay for the full cost of solar panels, get quotes from local installers and compare their offers to your current utility bills.
Leases/PPAs
Solar leases and power purchase agreements (PPAs) are long-term agreements between a homeowner and a solar service provider.
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.
These agreements typically last 20 to 25 years and include maintenance and a performance guarantee (aka a promise that the system will generate at least a certain amount of energy).
Both leases and PPAs often come with an “escalator clause,” which means the payments gradually increase over time, usually by between 1% and 3% per year. This is similar to the average annual increase in electricity prices.
Benefits
- Solar PPAs and leases both come with no up-front cost to the homeowner.
- Homeowners do not need a large income tax liability because the service provider is the one who claims the tax credits and incentives.
- The solar service provider essentially replaces most of your energy at a similar or lower price than the utility company.
- Third-party ownership often comes with long-term production guarantees, labor and workmanship warranties and maintenance.
- Because of recent tax incentives in the Inflation Reduction Act, leases and PPAs could be getting cheaper soon, especially in lower-income areas.
- Some newer kinds of leases and PPAs include battery storage, and even include discounts for people willing to sign up for demand response and/or virtual power plant programs.
Drawbacks
- Leases and PPAs offer the lowest energy bill savings of any option of paying for solar.
- Because of the escalator clauses, it is possible to end up paying more for a PPA or lease than you would have for energy from the utility company.
- 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.
- 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 and not enough tax liability to take the federal tax credit.
Be careful when signing up for a solar lease or PPA. Carefully examine the costs, escalator clause, 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 fee, interest rate, and payment schedule. 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 home. 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.
Ben Zientara
Solar Policy Analyst and Researcher
Ben is a writer, researcher, and data analysis expert who has worked for clients in the sustainability, public administration, and clean energy sectors.