Navigating Solar System Financing: Pros and Cons of 3 Options
So, you have decided to go solar, so let us help you decide your solar system payment options. Typically, there are three main options to pay for your system: purchase, finance, or lease. Each of these options has its pros and cons and will impact how much you will save when going solar. Other options include Power Purchase Agreements (PPAs) and Community solar, but we won’t cover them in this article. Each case is unique, so contact Solar Topps’ Energy Consultants to discuss the best option for you.
Purchasing Your Solar System
When you purchase your solar system, you are the owner. As such, you are able to take advantage of Federal, State, and Utility incentives to help lower your net cost. At the Federal level, the Investment Tax Credit (ITC) provides a 30% tax credit for solar installations. The amount will decrease to 26% in 2033, then to 22% in 2034, and expire in 2035 for homeowners.
When you buy, upfront payments for energy in kilowatt-hours (kWh) are often lower than other choices and utility rates. To calculate the cost per watt, divide the system cost by the system size. By buying our system, you secure a low kWh rate, boosting your home’s value. In fact, according to Zillow, installing solar panels on your roof could increase your property value by 4 percent.
- You are the owner of the system
- You are able to take advantage of all Federal, State and Utility incentives that reduce upfront cost
- You lock in the lowest kWh rate allowing you to save more sooner
- You are able to dramatically increase the value of your home
- There are upfront costs
Financing Your Solar System
Financing a solar system is another very popular option. Like financing a car or home, you own the system while a third-party lender finances part or all of it. This financing can come from traditional sources like banks or from solar-specific financing partners like GoodLeap, GreenSky, and Sunlight Financial.
Based on your credit score, these institutions offer various options with different terms and rates to meet your needs. These financing companies cover the system installation costs, and you make monthly payments once it’s up and running. Carefully read the financing agreement as it may contain clauses that require a balloon payment within the first 18 months of financing to reduce the principal balance.
- You are the owner of the system
- You are able to take advantage of the Federal, State and Utility incentives that reduce the system cost
- You can finance part or all of the system depending on your needs
- The financing company will conduct a credit check and will require guarantees that the borrower pays the full financed amount.
- You make monthly payments to the financing company in addition to the payments you will make to the Utility company
- To keep your interest rates low, you may need to make a balloon payment within the first 18 months of financing the system.
Leasing Your Solar System
Lastly, and perhaps most common, is the ability to lease your solar system. In this instance, you are not the owner of the system, that would be the lessor, so you are not entitled to the ITC or other available incentives. There are two types of leases we will discuss: prepaid and monthly.
A prepaid lease allows you to make upfront payments on your solar system at a significant discount. Once your payments are made, you do not owe any additional payments thereafter. This option is good for those who have disposable income but not the tax appetite to take advantage of the ITC or other available incentives. If you sell the home, you are typically able to transfer the lease without issue as there are no further payments to be made.
Alternatively, a monthly lease requires no upfront payment. Rather, once your system is operating, you make monthly payments to the lessor. The terms on these types of leases can range from 20 – 25 years typically. It is important to read the details on lease agreements as you may be subjected to an annual escalation typically between 1.99% – 3.99%, which means you will be paying more each year. Also, typically there are fees associated with paying via check as compared to a direct deposit through an ACH (automated clearing house) set up through your bank account. If you sell the home, you will need to assign the lease to the new homeowner, which means they too would need to qualify for the lease. So be sure they have good enough credit to assume the lease.
A lease is beneficial because you do not have to worry about the system. Most leases come with a power production guarantee meaning that the lessor is promising the system will perform to a minimum degree in order to produce the required amount of power. If something goes wrong, it is the lessor’s obligation to fix it. However, aspects like shade or dirt on the panels, are typically the responsibility of the homeowner to take care of. Once again, the details of all obligations are found within the lease agreement.
- Depending on the type of lease, there are no upfront payments allowing you to go solar for $0
- If you cannot take advantage of the ITC, lease is a great option to go solar
- You are not responsible for the system’s performance or any maintenance
- If you choose a monthly lease, you are still making monthly payments to the Lessor in addition to the payments you make to the Utility company.
- With a monthly lease, depending on your payment amount and term length, your kWh rate for energy will be higher than if you were to purchase the system, hence you may not save as much
- Some monthly leases will have a built-in annual escalation that will require you to pay more each year
- If you are selling the home, the homeowner may need to qualify for the lease
The Main Takeaway
There are three payment options for solar: purchasing, financing or lease. All options should help you save, some more than others. Depending on your ability to take advantage of the ITC or other available incentives, credit score, and desire to make a few payments or monthly payments, each option may offer slightly better or worse value to you. To learn more about which option is the best for you, please feel free to contact one of our Energy Consultants today. A quick conversation can save you thousands.