Using Low Interest Loan to Go Solar at Zero Upfront Cost: Instant Payback

The reliability of solar panels and their ability to save on power bills have been proven in millions of installations worldwide. Solar panels have been used successfully at all project scales, ranging from small home systems with less than 20 modules, to utility-scale solar farms that cover hundreds of acres. High-quality solar panels have a service life of more than 25 years, and the leading manufacturers offer solid warranties that protect your investment.

Solaria PowerXT Black Solar Panels on a house in Massachusetts

However, the upfront cost of going solar in the US can be high. Consider the average photovoltaic system prices reported by Solar Energy Industries Association (SEIA), in their quarterly Solar Market Insight Report from December 2021.

  • Residential solar systems: $3.06 per watt ($3,060 per kilowatt)
  • Commercial solar systems: $1.45 per watt ($1,450 per kilowatt)
  • Utility solar system with fixed panels: $0.89 per watt ($890 per kilowatt)
  • Utility solar system with tracking panels: $1.01 per watt ($1,010 per kilowatt)

Based on these numbers, a homeowner planning to install a 5-kW solar panel system can expect a price tag of around $15,300. For a larger 10-kW system, the average cost doubles to $30,600. The savings achieved by solar panels during their service life are much higher than their ownership costs, but paying the full price upfront represents a major expense.

Reducing the Solar Payback Period to Zero with Loan Financing

Many homeowners and businesses use loan financing when going solar, which lets them avoid the upfront investment.

If you can get a low interest rate and a long repayment period, the monthly power bill savings will be higher than the loan payments. In other words, your solar panels generate the cash flow needed to pay the loan, and the remaining savings stay in your pocket.

Paying the full price of a home solar system upfront is an option, but you must wait until the end of the payback period to break even. Depending on conditions like local electricity prices and incentive programs, the payback period of solar panels can increase or decrease:

  • If you live in a place with abundant sunshine or expensive electricity, you can expect a quick payback period. More sunshine translates into more kilowatt-hours per year, and a higher kWh price means your savings are increased.
  • The payback period is also shortened when you have access to solar incentives like tax credits, tax exemptions, cash rebates, renewable energy certificates (RECs), and favorable net metering policies.
  • However, the opposite is also true. The payback period of solar panels is extended by factors like low electricity prices, low sunshine, and a lack of incentive programs.

Solar payback periods can vary a lot from state to state. You can recover your investment in less than five years with favorable conditions, but the payback period can be extended to more than 10 years with unfavorable conditions. However, the 25-year service life of solar panels gives you more than enough time to break even in any case. 😉

With loan financing, the bank assumes the payback period and you can save on power bills right away. While this means you pay interest, you can look for a low rate to reduce the amount charged over time. Ideally, you should look for a loan with monthly payments that are less than your electricity savings.

  • For example, if your home solar system saves $1,500 per year and the loan payments add up to $1,200, you’re left with $300 in net savings from year one.
  • However, these solar panels cannot pay for themselves if the loan charges more than $1,500 per year, and the difference must come from your pocket.

There are two main ways to reduce your annual loan payments: getting a lower interest rate or getting a longer repayment period. Of course, having access to a loan with both benefits is the best-case scenario. Just like when comparing solar installers, make sure you check several financing options before signing a deal. Solar quotes will normally include a savings estimate, and you can compare this number with the annual loan payments.

Can I Still Get Solar Incentives When Using a Loan?

If you’re worried about losing solar incentives when using a loan, we have good news for you! Most incentive programs require you to be the legal owner of the solar panels, regardless of how they were purchased. When using a loan, you owe money to a financial institution, but the solar power system belongs to you from the start. In other words, solar owners who use loan financing get the same incentives as those who pay upfront.

Solar incentives like tax credits and renewable energy certificates (REC) can help you with loan payments. When these benefits are available, they generate additional cash flows that are combined with your power bill savings.

  • State and federal tax credits are deducted when you file your next declaration, and the funds saved on taxes can be used for loan payments.
  • If your state has a solar REC program, you can also get additional cash flow by selling those certificates. Generally, these programs will give you one REC for every 1,000-kWh produced by your solar panels.
  • Performance-based incentive programs were common several years ago, but they are now harder to find. These programs give you a bonus for each kWh generated by solar panels, on top of what you normally save. The SMART solar program in Massachusetts is an example of this.

You can use a solar loan without worrying about missed incentives, since you’re the legal owner of the PV system. Incentives are only lost when you lease solar panels, or when you sign a Power Purchase Agreement (PPA). In these cases, the solar panels are legally owned by the company offering you the lease or PPA, and this means they claim the incentives.

Low Interest Financing Options for Solar Panels in the US

As mentioned above, going solar with a loan is viable when you can get a low interest rate and a long repayment period. Any loan that meets these conditions is generally a good option. Here we will discuss two financing options that are popular for home solar systems in the US:

  • A Home Equity Line of Credit or HELOC can be an attractive option if you own equity in your home and have a good credit record. Currently, HELOC loans can be obtained with interest rates below 5%-6% (depending on your credit score) as of January 2022, with a typical repayment period between 10 and 20 years. With less favorable credit scores, the typical rate of a HELOC is closer to 10%.
  • Property Assessed Clean Energy or PACE loans are specifically designed for building upgrades that deal with energy efficiency or clean generation, and this includes solar panels. The annual interest rates of PACE loans can vary, but they are normally below 9% and sometimes less than 5%. PACE loans also have typical repayment periods of 10-20 years, and they are paid back along with your property taxes.

Loan terms can vary depending on your location and lender, but you can generally expect similar conditions with HELOC and PACE loans. However, there is an important difference to keep in mind. A HELOC places a lien on your property, which means you must pay it off completely if you intend to sell the home. On the other hand, a PACE loan is bound to the property and not the owner, and it can be easily transferred to the buyer during a sale.

In a few words, a HELOC is a better option if you intend to use your home during the entire repayment period, while a PACE loan is preferred if you want solar panels but have plans to sell your home eventually.

Cash Flow for a Solar Loan: A Simplified Example

As a quick example of how solar panels can pay off a loan by themselves, assume you can get a 6% loan with a repayment period of 15 years. This loan is used for a 5-kW home solar system, which is normally priced at around $15,000, but let’s assume you can reduce this to $9,500 with local solar incentives.

  • Under these conditions, the resulting payment is $80.17 per month, or $962 per year.
  • If the 5-kW home solar system can generate more than $962 in annual savings, it can pay off the loan by itself.

Let’s assume the 5-kW solar PV system is installed under favorable sunshine conditions, generating 7,500 kWh per year. If the local electricity price is 16 cents/kWh, the solar panels save $1,200 annually. These savings are enough to cover all loan payments, while still leaving $238 in net savings during the first year.

If you’re considering a solar loan, having an accurate estimate of your electricity savings is very important. Using the same loan conditions, let’s repeat the calculation for a homeowner who generates 6,800 kWh per year, with an electricity price of 12 cents/kWh. In this case, the solar PV system only saves $816 per year, while the total loan payment is $962. The owner must pay an extra $146 since the solar savings alone cannot cover the loan.

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