With more than 2 million people who have already made a switch to solar, it is no doubt proof that going solar is an investment worth the while.
Solar financing is a means to assist homeowners intending to go solar with loan and lease programs that would help them come up with the funds required to buy and set up a solar system which includes panels, inverters, batteries and installation equipment.
This post is aimed at looking through the different solar financing options and how they work and operate.
How Does Solar Financing Work
Solar financing is an option for individuals to own solar panels and its equipment by paying in cash, taking a loan or leasing it. These are the channels deployed to come up with the funds needed to purchase a solar system.
You can choose to pay in installments over time instead of out-of-pocket upfront at the time of purchase. Or either take a loan and pay the amount and accumulated interest monthly. The amount you will pay monthly is estimated or calculated based on the interest and other factors like your income, credit, lender’s rate, existing debts and so on.
There are a number of financing partners available through EnergySage, Greenage Technologies Power Systems Limited and other platforms and works fine for so many people. If you don’t have the funds handy, it is best you contact solar companies like Greenage, your credit union, bank and solar installers.
The Interest rates of these companies on solar loans range from about 5% to 36%. Banks and credit unions can also help you purchase solar panels.
3 Solar Financing Options
Financing your solar switch is dependent on your readily available income, income taxes, your location, and your credit score.
There are 3 main types of solar financing options. They are:
- Cash purchase option
- Solar loan option
- Solar lease/Power purchase agreement option.
1. Cash purchase option
The cash purchase option is the best option for homeowners looking to maximize their solar savings.
Purchasing a solar system is a significant purchase with a heavy investment capital required and if you already have enough cash to do this then you’re taking the best solar financing option.
How is it the best?
When you buy a residential solar system upfront, you have automatically bought 100% of your electrical needs for the next 25years in advance.
What this means is that you will not have to worry about the subsequent hikes in electricity bills.
This financing option also qualifies you for tax incentives associated with going solar. A good example is the Federal Tax Credits and Rebates.
2. Solar loan option
The emergence of solar loans has made solar financing easier, especially for homeowners who can not make an upfront purchase at once.
With the solar loan option, you have the opportunity to go solar with little or no money down. But, if you decide to finance your solar through the solar loan option then you would need to pay extra attention to some key things like;
- The annual percentage rate
- Origination fee
- Loan terms
- Interest fees and rate
- And the overall payment period.
Two types of Solar Loan
There are 2 main types of loans. They are;
- Secured solar loan
- Unsecured solar loan.
Secured solar loan
A secured solar loan would require the borrower to present collateral to the lender. This collateral acts as a form of security for the lender and as such would attract a lower interest rate for the borrower.
Unsecured solar loan
The unsecured solar loan type does not require any form of collateral and puts the lender at a higher risk.
This in turn attracts a higher interest rate on the borrower.
3. Solar lease/ Power purchase agreement (PPA)
A solar lease involves you paying a fixed amount of money periodically ( say monthly ) to a solar company for using their panels and other related pieces of equipment that would be installed on the roof.
While in a power purchase agreement, you pay for the electricity being produced by the solar system i.e you pay for the exact amount of electricity you consume.
A solar lease would at first look very attractive especially since you will not need any money down to make an initial down deposit but, leasing a solar system will not qualify you to receive any incentives associated with using solar energy as all incentives would be giving to the solar company leasing you the panels.
These lease payments might also include a percentage with which there would be a yearly increase in the amount of money you pay monthly. This inclusion is known as an escalator.
The periodic payments in your solar lease program do not consider how much energy you must have consumed as payment amounts are always fixed. As such you might end up paying for more than you consumed.
The pros and cons of the different solar Financing options
Making the switch to solar energy can be quite expensive, this is why it is essential to properly look into the different solar financing options.
This would help you identify which one you’re more suited for.
1. Cash purchase
Cash purchase stands as the best solar financing option because it provides the largest long-term value.
✓ You do not have to pay any interest rates
✓ You can begin to save on your monthly electric bills immediately
✓ It increases the value of your home
✓ It makes you eligible for solar incentives
✓ You are solely responsible for the maintenance of your solar panels.
✓ It requires a large upfront capital
2. Solar loans
Solar allows you direct ownership of the solar system without having to make any down payments as well as helps you spread the payment for the solar system over a period of time letting you pay back in bits.
✓ It requires little or no cash as upfront payment
✓ It allows you to make other investments elsewhere whilst investing in solar energy
✓ Solar loans still make you eligible for solar incentives
✓ Helps to increase your home value
There’s an interest rate on every payment which would make you end up paying more than the actual worth of the solar system.
3. Solar lease/ PPA
This solar financing option helps you use clean renewable energy sources without owning the solar system.
✓ It requires zero down payment
✓ Requires zero maintenance
✓ Makes room for low-income families to support clean energy
✓ Brings zero increase to the value of your home
✓ Does not help in maximizing your return on investment
✓ It does not qualify you for any solar incentives
How do I know which solar Financing option is best for me?
The type of solar financing option you would use is dependent on what you are set to get from them. Below are some of the factors for each financing option;
For cash purchase
The cash purchase option is suitable for you if:
- You are a homeowner looking to maximize your solar energy savings.
- You have enough tax liability to take advantage of the tax incentives for the use of solar
- You have enough money to fully pay for a solar panel system upfront.
For a solar loan
You can take a solar loan if:
- You do not have the money to directly buy a solar system upfront but would want to enjoy the tax incentives attached
- You want to save on how much you spend on electricity bills
For a solar lease/PPA
The solar lease option is for you if:
- You are not qualified for the solar tax incentives
- You are not ready to commit to a personal system
- You are not interested in the maintenance routine
- You are just looking to reduce the cost of your monthly electricity bill.
Solar Financing Rates
Solar financing rate is the interest rate and other fees on solar loans. Rates for most solar loan types are between 5%-16% but can vary depending on your location, solar loan lender, credit score and other factors.
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Solar Financing Calculator
Solar financing calculator is used to calculate solar loan fees to determine the monthly payments and total interest you will pay upon taking the solar loan.
To use a solar calculator, click here.
What is the best way to Finance Solar?
If you have the funds handy, it is best you pay outrightly. Paying in cash is the most advantageous way for solar financing.
For those without the funds, you can go for:
- Solar loan which can also be the best way and
- Solar lease.
Is Solar Financing worth it?
From the advantages we have discussed, most homeowners would agree that the idea of solar financing is worth it. This is because it renders a long-term usage of electricity without depending on NEPA or other sources.
It also cuts the electricity bills for you to save more.
Solar financing provides a long-term cut on electricity bills as well as brings in a yielding profit and other incentives related to using solar energy.
These and a reliable power supply are what you would stand to enjoy over the functioning time of the system.
- Solar financing is aimed at assisting your transition to solar energy
- There are 3 types of solar financing options; Cash purchase, Solar loans, and Solar lease/ PPA
- Cash purchase is so far the best solar financing option
- A solar loan is the second best option for your solar financing
- Solar lease/ PPA is the least recommended as they do not add any value to your home or pocket.
Frequently Asked Questions on Solar Financing
Is financing available for solar?
Yes, there are many ways to finance solar panels both in Nigeria and abroad.
You can finance it through;
- Credit unions
- Solar companies and
- Solar installers who offer loans specifically for installing solar equipment.
What type of loan is a solar panel loan?
Solar panel loans are basically personal loans used to finance the purchase and installation of solar panels, equipment and inverter.
These loans can have amounts from N200,000 to N1,500,000, depending on the plan you opted for. It can be repaid in monthly installments, typically over a one- to three-year term.
Personal solar loans are one to install solar in your home and other options include home equity, federal incentives or leasing.
What credit score do you need for solar?
An individual with a credit score over 600, has a great chance of being approved for a solar loan with low monthly payments. You can now end up saving money every month compared to your current power bill.
Few banks in Nigeria offer solar loans but other banks in other countries have an option to take solar loans and an energy efficiency mortgage to finance your solar panels.
How does the interest works on solar loan
Interest on solar loans is paid monthly and it accumulates monthly. Some are calculated on 5% to 16% depending on many factors like the lender’s rate, your income and more.