The rapidly increasing trend of solar panels worldwide has pushed more households to switch to solar power systems. While solar systems significantly reduce energy consumption costs, they come with a high upfront price that many cannot afford. The optimal solution most households opt for is solar panel financing. You can get loans for solar panels and embrace the true power of cost-efficient energy.
However, as solar panels are a new addition to people’s homes, not many know how to get the required funding and how solar panel loans work. Here, we will talk about the types of solar loans, their terms and rates, and qualification options to get you started.Get A Free Solar Quote
Solar Loans: Understanding the Types
Before you apply for a solar loan, you must know about the different types of solar loans. Familiarity with solar loan types can help you make an informed selection that fits your finances in the long run. Solar loans can be classified into two categories:
- Combo Loans
- Reamortization Loans
Let’s explore each category to learn more.
Solar combo loans are ideal for those certain about their solar tax credit claims in a year’s timeline. These loans are a combination of two loan types with specific goals. The primary part of the loan is to pay off the net cost of the solar system, while the secondary part (also known as a bridge loan) is for the value of the tax credit (of the applicant).
What makes combo loans great is the no upfront payment terms they offer. You can apply for the loan and pay it off in monthly installments without accumulating a large down payment sum. For instance, if you buy a solar system worth $30,000, your primary loan will be $21,000, and the bridge loan will be $9000.
It is worth noting that the bridge loan depends on the 30% solar tax credit you may receive from the state based on your income (consult your tax consultant for this). Since you may have 12-18 months to claim your tax credit, the bridge loan must be paid within the same period (max by 18 months). You can pay off the bridge loan by other means. However, you must do it within the assigned period to avoid bearing impacts on your loan’s interest.
When borrowers fail to pay their bridge loans in time, the balance rolls into the primary loan bracket, raising monthly payments and overall interest rates.
Why Should You Get Solar Combo Loans?
Solar combo loans have multiple advantages for those with a decent income (eligible for a 30% tax credit). We have covered a few below to give you clarity for an informed choice.
One-Stop Financing Solution
Combo loans can be your one-stop financing option for solar panel purchase, installation, and energy-efficient upgrades. You can skip the hassle of applying for different loans to achieve multiple goals. One-stop financing is handy when aiming to save upfront and pay off costs.
Lower Interest Rates
Combo loans have lower interest rates based on how they are designed. The primary loan covers the cost of the solar system, while the bridge loan is covered by your tax credit (claimed within 12-18 months). The only possible impact you might bear is if you fail to pay off the bridge loan in the designated period.
Long-Term Cost Efficiency
Solar combo loans can be ideal for long-term cost efficiency. Since these loans do not require upfront payments, you can save sufficient amounts in the initial phase. Moreover, paying off the bridge loan in time saves you from higher interest rates (due to rolling balance).
Reamortization loans are more suitable for those with uncertainty regarding their financial situation and solar credit claims. Typically, retired professionals and those with potential savings opt for this option when switching to solar systems. Reamortization loans require lump sum upfront payments to cover a part of the principal loan amount.
The idea behind these loans is to lower your monthly payments as you move forward with the financing plan. What makes reamortization loans popular is the option to pay off a desired proportion of money to lower the monthly payments. When you apply for it, you pay the contract price of the solar system for the period before applying the tax credit.
Once you pay your tax credit (as the lump sum amount), you can get a reasonable monthly payment figure for the rest of the loan period.
Why Should You Get Reamortization Loans?
Reamortization loans have several perks for borrowers. We have covered the top few below to give you a better idea.
Flexible Lump Sum Payments
When applying for solar reamortization loans, you can make lump sum payments based on your preferences. Since you pay the amounts from your tax credit, you can opt for paying more than your tax credit amount to reduce monthly payments. This option comes in handy when you want a financing plan you can control.
Improved Cash Flow
When you have to pay lower monthly payments, you can improve your cash flow to meet your other expenses. Most people prefer paying higher lump sum amounts to significantly reduce their monthly installments.
No Impact on Benefits
Reamortization loans have no impact on solar benefits due to loan adjustments. You can continue to enjoy reduced electricity costs and other incentives without worrying about losing them. Reamortization loans can be great for those seeking flexibility in loan payment terms.
Solar Loan Terms
One of the major concerns most borrowers have is regarding the solar loan terms. When applying for loans for solar panels, you might want to thoroughly check the lender’s terms to avoid uncertainty down the road. However, solar loans are quite flexible. You can choose your upfront payment proportion without having restrictions from the lender.
Moreover, you can choose the loan period based on your preferences. Typically, solar loan lenders offer financing options between 5-25 years. While valid, remember that short-term loans are more cost-efficient than long-term loans. Shorter loan terms have higher monthly payments but lower interest rates. On the contrary, longer loan terms have smaller monthly payments with higher interest rates.
This means you will ultimately pay more money in long-term loans as compared to short-term loans due to higher interest proportions.
Interest Rates on Solar Loans
Solar loan interest rates are a concerning factor for most borrowers. Based on the facts explained above, borrowers may not be able to avoid interest rates at any cost. They can only lower the proportion of money they pay as interest to lenders. Please note that interest rates vary for each lender. You may consult different lenders in your area to compare and pick the best option.
While there is not much you can do about interest rates, you can follow a few tips to minimize the interest proportion.
Improve Your Credit Score
Your credit score has a lot to do with the interest rate you get on your loans for solar panels. The higher your credit score, the lower your interest rate will be. Take steps to improve your credit score before applying for a solar loan. For instance, paying bills on time, reducing debt, and auditing your credit history for errors are a few steps you can try.
Make Larger Upfront Payments
Your down payment can greatly influence the interest rate. If you pay a larger upfront payment, you can reduce the monthly payment amounts and the total (applicable) interest. Larger down payments also enable you to make more negotiations with lenders.
Compare Different Lenders
Some borrowers make the mistake of shopping only from one lender. The rule of thumb to get the lowest (possible) interest rate on your loan is by checking multiple lenders and comparing their financing options. You can also base your decisions on how flexible a lender is in terms of loan repayment.
Qualification Standards for Solar Loans
To apply for a solar loan, you must meet the qualification requirements for loan approval. As a borrower, you must prepare yourself a few months before applying for solar loans. Although the qualification terms vary for different lenders, the basic ground for each includes the following terms.
- A borrower must have a FICO credit score of 650 or higher
- A borrower’s debt-to-income (DTI) ratio must be below 50%
- A borrower must have their name on the property’s title to get solar panels
Sometimes, adding a co-borrower with a higher credit score can compensate for your lower score. They can help you get loans at lower interest rates based on their positive credit history. However, you must take the co-borrower in confidence before adding their name to the application. Failing to meet your loan terms will impact your co-borrower's credit score.
Applying for Solar Loans: The Takeaway
Applying for solar loans can be tricky when you are unaware of the loan types, terms, interest rates, and qualification standards. All these factors play a crucial role in determining the best loan option that fits your budget equation. The above details provide you with the information you need to apply for solar loans. We recommend doing your market research to compare different lenders and make an informed selection.Get A Free Solar Quote