How Solar Panel Financing Rates are Determined

As with most major purchases – such as a car or RV -- many homeowners prefer not to pay cash for such items but instead, choose to borrow money for the purchase and pay it back over time. Depending on the type of financing the homeowner chooses, the interest rate or finance charge can vary greatly, depending on many factors. To help you choose your solar financing wisely, we offer this overview of how solar financing works and the different solar power loan rates available. Before discussing various types of solar financing options, it’s important discuss how the prime solar panel financing rates affect all of these types of loans. The Prime Rate The prime rate is the interest rate that commercial banks charge their preferred customers, or those with the highest credit ratings. It is used to determine borrowing costs on many short-term loan products. Because this is the rate that lenders are paying for their funds, any increases in the prime rate will tend to cause interest rates for other loans to go up as well. At the moment, the prime rate is slowly rising over time. At the time of this writing (October 2018), it is 5.25% but one month ago, it was 5.00%. For this reason, homeowners who are thinking about going solar and financing their purchase are encouraged not to wait! Rather, act now before the cost of borrowing for solar installation goes up. Solar Financing Equals Savings Any time a homeowner borrows money for a major home improvement project and pays the money back over time it’s called a home improvement loan. When it comes to borrowing money for solar installation, the main goal is to make sure the monthly loan payment is lower than the home’s monthly power bill before going solar. The difference between the two payments represents the savings benefit to the homeowner. This is because the power produced by the solar energy system will generally be “offsetting” or replacing the electricity previously purchased from the electric utility. So, for example, if a homeowner can borrow the money for a solar system at $125/month and thereby eliminate a power bill that was previously about $200/month, the homeowner can pocket an easy $75/month in savings! That’s about $1,000 per year or $10,000 in 10 years! To see how this works in practice, let’s look at different ways to finance solar. Types of Solar Panel Loans and Financing Any time a homeowner borrows money for a major home improvement project and pays the money back over time, that is called a home improvement loan. In general, there are two types of home improvement loans: secured and unsecured. A secured home improvement loan is backed by some type of collateral – usually the asset value of the home itself or some other real estate – which tends to reduce the lender’s risk and therefore provides for a lower interest rate. In addition, tax rules say that any interest paid on these types of loans (secured by home value) can be deducted when calculating tax liability, just like a home mortgage. For these reasons, home improvement loans backed by home equity quickly became a preferred type of financing when the solar movement first took off in the early 2000’s. An unsecured home improvement loan, by contrast, is one that is not back by any collateral and for that reason, represents more risk for the lender and for that reason, carries a higher interest rate much like a credit card loan does of 12-18% or more. Home Equity Loans vs. Home Equity Lines of Credit (HELOCs) The main difference between these two types of borrowing is that the home equity loan allows a fixed amount of money to be borrowed and paid back over a fixed period of time with a fixed number of payments (e.g., 5 years or 60 months). The interest rate is based, in part, on these variables along with the value of the collateral (home equity value) and (to a lesser extent) the credit rating of the borrower. By contrast, the home equity line of credit or HELOC is more flexible, allowing funds to be borrowed up to a certain maximum amount, with repayment schedules to be more open-ended. This flexibility allows homeowners to combine several home improvement projects into a single HELOC and also allows borrowing for projects whose costs can change as they move forward. Because home equity loans or HELOCS work in practice as a second mortgage, the interest rate for these is also determined by how much of the home’s equity is being used as collateral for the first mortgage. Put another way, the less net home equity that is available to use as collateral for the home equity loan, the higher the interest rates will generally be.  Solar Financing During the Great Recession Home equity loans and HELOCs were the preferred types of solar financing options up until the financial crisis of 2008 that suddenly made them unavailable since it was not clear what home values actually were. One of the ways the solar industry responded to this lack of financing was to offer solar panel leases, which had long been a popular way for commercial properties and businesses to finance their solar energy systems without owning them. In general, high costs of creating and administering solar leases had prevented them from being offered to the residential market for individual home systems but by standardizing the solar lease offering and using e-documents to record them, it became possible to lower the cost of these instruments and make them very affordable. There are several differences between a solar lease and a solar loan. With a solar lease, the homeowner doesn’t borrow money to purchase the system but instead, pays the leasing company a monthly fee to use the solar equipment to produce the home’s electricity. Normally, the contract for this lease extends across a longer period of time, such as 15 or 20 years. The solar lease is still an attractive instrument for financing solar energy systems for certain audiences and this is discussed more extensively in other articles on our website. The important point to be made here is that for a few years, the solar lease allowed homeowners to continue to go solar – with payments that were substantially less than their former monthly power bills – until the financial markets – and home values – stabilized enough for HELOCS to once again become affordable and popular. Solar Energy Loans Finally Offered As Markets Mature It took some time for the solar industry to come up with a solar loan as attractive as the one now offered by Mosaic through SunPower by Stellar Solar. The reason for this is that solar panels fit into a unique category of assets that was a challenge for lenders to address. In its overall value, the installed solar energy system was in the same range as a car or boat. But unlike these assets, solar panels are attached or considered part of the house. As such, in case the loan failed, the solar panels could not be removed or "repossessed" like a car or boat would be. So, this represented a special type of risk for the lender, making it more like an unsecured "signature loan," or similar to borrowing on a credit card, which demands an interest rate of 18% or more. There was also some initial concern among lenders about what the actual useful lifetime value of solar clean energy was. The main value of the solar panel is its ability to generate electricity, which has a specific cash value, set by the power company. Would solar panels be able to produce a similar amount of power over 5-10 years? How about 15 years? How long could a loan be supported by this asset? Fortunately, solar panels began to demonstrate that they would continue to produce a definite amount of power over time and, by doing so, would offset the cost of electricity from the utility, which has always gone up (not down) over time. Most solar panels carry power warranties stating that solar output will not drop more than 1% per year over 20 years. They also carry a standard 10-year “bumper to bumper” warranty against failure of any type. Moreover, the best solar companies (like SunPower) now guarantee that solar output won’t drop more than .5% over a 25-year lifetime and also carry a 25-year overall warranty. This type of solid solar track record and warranty protection served to reduce risk to the lenders which, in turn, make it easier for lenders to offer longer terms on solar financing. Instead of only 5-year loans (which are common for cars), solar energy loans became available that could be paid back over 10 or 15 years. In recent years, specialized solar loan programs became available from lenders like Mosaic, which recognized the special value and needs of solar homeowners. They are able to offer loans that spread payments across terms of up to 15 years but with affordable interest rates that ensure monthly payments will be considerably less than what homeowners are currently paying for the power bills. And unlike power bill payments which always go up over time, these solar loan payments are fixed across their terms as they are paid back, which means that solar homeowners actually save more and more money as time goes by. The SunPower by Stellar Solar Mosaic Solar Loan Program A common secured loan that we provide at SunPower by Stellar Solar is the Mosaic Solar Loan. The Mosaic loan is one of the most popular solar loan currently available, allowing homeowners to get approved faster and get their solar projects started sooner. The other benefits offered by this solar loan include: 1) no prepayment penalties and 2) little to no loan origination fees. There are currently three different types of Mosaic loans, a 10-year loan with 3.99% interest, a 15 year at 4.99%, and a 20-year loan at 5.49%. These will all help you save money by going solar now! As you can see, solar loan interest rates are determined by a number of factors. Whether the loan is secured or unsecured by collateral, the duration of the loan, the credit score of the borrower and the current prime interest rate -- all come together to determine how much the interest rate on the given loan will be. As with any major purchase, homeowners should be fully aware of all of these factors in order to maximize their savings when they invest in solar energy, because all of these items affect the return on investment. Fortunately, your solar specialist from SunPower by Stellar Solar knows as much about lending as he does about clean energy!  If you are still unsure how much your solar loan interest will be, contact us today for a quote. Our San Diego solar panel company will be able to work up a quote for you quickly and find you financing at the lowest rates possible.  

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