The use of renewable energy sources like solar energy to generate power both on a domestic and industrial scale has been gaining traction over the last decade, with California leading the pack as the largest generator of solar power in the country. However, while the thought of contributing to help heal the planet and the promise of substantially reduced energy bills may be alluring, paying between $16,395 to $30,749 to set up a residential solar energy system does seem like quite a steep investment. These factors contribute to consider solar financing options.

Even if you consider the 30% federal tax credit on the overall cost of the installation, the investment is still sizable. Here is an introduction to solar financing options to help you take that step towards a more sustainable future.

Factors that affect costs of solar panels

Before we delve into the different financing options available to those of you considering installing a solar energy system, let us briefly examine some of the factors that will affect the cost of the system itself.

The need for solar panels

The type of solar energy system you will need to invest in will depend on the nature of your need. If you are connected to a utility grid and the main purpose you are looking at this investment is to save money on energy bills, you will need a grid-tie system.

Also, if your need is to use solar-generated power as a backup power source, or only for limited applications, you will need a grid-tie system with batteries.

If you live in a remote location with no access to a grid, you will need to invest in an off-grid system.

Read more: Home solar maintenance guide

Solar panel types

There are three main types of panels you can choose from.

Monocrystalline panels are the most expensive type of panels but are also the most energy-efficient. You will need fewer panels to generate power, which means you will need less space to install them. They will also last you as many as 35 years.

Polycrystalline solar panels are less expensive, but take up more space and are not as efficient as their monocrystalline counterparts. Longevity is limited to around 27 years.

The least expensive and efficient of these options are thin-film panels, which will last you only 17 years.

Solar panel capacities

Solar panels can vary from tiny panels that generate 5 watts to large premium panels capable of producing up to 400 watts. Most domestic panels produce around 330 watts.

Solar panel brands

The brand of panels you choose will affect your total cost. For example, a tier-one brand like Panasonic or Sunpower will cost you a fair bit more than a tier two or tier three brand. Of course, the more expensive panels come with better energy efficiency and after-sales service.

Energy consumption

The capacity of the solar system your home will need will depend on the energy consumption of your household. The more the consumption, the larger the system you will need, and the more it will cost you.

The average American household will need at least a 5-kilowatt solar energy system in order to save money on power bills. A system of that capacity will need 16 330 watt panels.

Installation type

Roof mounting solar panels are more affordable than installing them on the ground. 

Even when it comes to roof mounting, metal roofs with standing seams are the most affordable to mount panels on, followed by roofs with concrete tiles. Clay tiles are the most expensive to mount on since they require special brackets to lift the panels above the tiles.


Solar energy systems generate DC power. You will need inverters to convert this to DC power so you can utilize the energy at home. How many inverters you need and the brands you choose will affect the cost of your system.

Monitoring software

Depending on your service provider, you will need to bear the cost of subscribing to an interconnection tool or monitoring software in order to monitor and regulate your energy usage.

Can I opt for solar financing options?

Solar loans are a great option for homeowners looking to buy a solar power system. There are different types of solar loans, both secured (which will use your property as collateral) and unsecured. In fact, some lenders are willing to loan investors the entire cost of the system. Here are some compelling reasons for you to consider solar loans.

  1. Your monthly payment on your solar loan will ideally be lower than your monthly savings on your power bills, irrespective of whether your loan type is secured or unsecured.
  2. Multiple organizations offer customers solar loans, from traditional banks to solar panel manufacturers.
  3. Choosing a loan to finance your solar panel system should allow you to save between 40% to 70% on electricity bills during the life cycle of your system.
  4. Most solar loans are similar in structure, repayment terms, and fine print to home improvement loans. In some states, the interest rate charged on these loans may be lower than market rates.
  5. Solar loans offer you immediate returns in the form of the savings you will see on your power bills. In fact, you will begin to see savings even as you pay back your loan.
  6. Your savings will continue to grow even as electricity prices increase. 
  7. Buying a solar energy system using a loan will make you eligible for financial incentives, such as the federal investment tax credit of up to 30% of the cost of your system.  As an added incentive, interest paid on secured solar loans also qualifies as tax deductibles, putting more money back into your pocket.

Types of solar loans

Secured loans

  1. Applying for a secured loan takes longer than applying for an unsecured loan.
  2. The lending institution may want to appraise the value of your home.
  3. Interest rates tend to be lower because the risk involved is covered by the collateral.
  4. Lower interest rates mean lower monthly payments, and the interest paid is tax-deductible.

Home equity loans

  1. The most common type of secured loans is home equity loans or second mortgages. These are loans given against the equity you have in your home. This means your home is considered collateral.
  2. The interest rates of these loans are the lowest, ranging from 3.5% to 5.5%. The window to pay back the loan is also more favorable, between 7 years to 20 years.
  3. While choosing a shorter payback period might mean a higher monthly payment, it also means lower total costs over the life of the loan. The longer you take to pay it back, the more you will pay in interest.
  4. Defaulting on these loans will give the bank authority to foreclose on your home, even if your mortgage payments are up to date.

FHA, title 1 loan

  1. These loans are guaranteed by the government, even though your home will still be used as collateral.
  2. Interest rates on these loans are slightly higher, ranging from 5% to 7.5%. Payback loan terms are the same as home equity loans.
  3. In this case, the lender gets a lien on your home if you default on payments. This will allow you to pay it back by selling the house.

Unsecured loans

  1. These loans do not require any collateral, which means the risk taken by the lender is higher.
  2. As a result, interest rates on unsecured loans may be as high as 10%.
  3. Unsecured solar loans are similar to credit cards or personal loans, and the interest paid on them is not tax-deductible.
  4. Defaulting on these loans will directly impact your credit score.

Solar leases and power purchase agreements

Solar leases and PPAs (power purchase agreements) are an agreement akin to renting a solar energy system from a service provider. This will give you many of the benefits of having a solar power system installed without having to pay for it. Here are some of the benefits.

  1. Under a PPA, a third party owner (TPO) will install the system on your property, and you will pay them a below-market rate fee to use the power generated for the agreed time period.
  2. While you have zero upfront cost to worry about, you will still save between 10% to 30% on your monthly power bills.
  3. The responsibility of maintaining the system falls on the TPO. Once the lease period runs out, the TPO may either remove the system from your property or sell it to you at a fair market price.
  4. This option is offered to consumers across 26 states in the country.
  5. Solar leases and PPAs come with zero down payment, prepaid and custom down payment options. However, terms and conditions vary depending on the state you live in and the service provider.
  6. However, since the TPO owns the system and not you, the TPO will get the benefits of rebates and tax exemptions.

Read more: Sunroom financing: Patio enclosures financing & loan options

An introduction to solar financing options was last modified: August 24th, 2021 by Narayan Shrouthy
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