Solar loans and solar leases are two popular methods homeowners use to pay for solar PV. Both a solar loan and a solar lease can offer a “zero-down” approach to going solar. Many homeowners find this to be an attractive alternative to paying for a system out of pocket.
There are distinct differences between solar loans and solar leases, as well as benefits and considerations to each approach. This article aims to first define each financing approach, and then discuss the financial implications of each.
Solar leasing is one solar financing method. Large, national scale solar developers most typically offer solar leases. When a homeowner enters a solar lease with a solar company, they are essentially renting their roof to the national sized company. The solar developer will install the solar modules and retain ownership of the system. The homeowner can then benefit from a reduction in electricity bills starting day one, and often, will receive a system maintenance plan. The homeowner is responsible for repaying the lease via a monthly payment, which is subject to increase 1-3% per year. A solar power purchase agreement (PPA) is very similar to a solar lease, but the two have distinct repayment approaches. Under a PPA, a homeowner pays the solar developer a rate per kWh for the electricity that the solar array produces.
Loan Options: Solar Loans vs. Home Equity
An alternative financing approach would be a solar loan. Solar companies or third party financiers often offer solar loans. Although not branded as a solar loan, many homeowners can also use home equity loans to finance the cost of going solar. With a “zero-down” solar loan, homeowners will benefit from their solar installation starting day one. The repayment terms can vary significantly depending upon the loan, anywhere between 5-20 years.
The homeowner is then responsible for making monthly payments on the loan, though these payments are typically a fixed amount. Some solar loans will also include a PV production guarantee. A major benefit of a solar loan is that a homeowner can maintain ownership of the PV array, which is an important consideration that will be discussed below.
Lease vs. Loan
It is important to recognize that all incentives, tax benefits, and payments/credits from the utility go to the system owner. In a leased system, the national sized company is the system owner. In a solar array installed using a loan, the homeowner is the system owner.
This means when a homeowner is the system owner, they receive the 30% Federal ITC. In RI, the homeowner also receives the up-front grant if they decide on a Net Metering installation. In a leased system, the owning company would receive these benefits.
There is no doubt that either financing approach can ultimately result in financial returns for a homeowner. However, there is a distinct financial benefit associated with using solar loans, and these benefits derive specifically from system ownership. Newport Solar typically sees a 10% – 15% savings for clients that choose to lease their system from a national sized installer. Newport Solar regularly produces financing proposal that yields a 40% – 60% reduction of a homeowner’s electricity bill. The reason for this stems from the third party taking a piece of the value produced to cover the cost of managing the monthly billing and monitoring of the solar array.
Summary of incentive levels in Rhode Island under different payment approaches (2017).
If a homeowner pursues a solar lease, they will forgo the Federal ITC and their system will lose out on the full value of local incentives, which in addition to management fees, diminishes the financial return of the installation.
Leasing can be a good choice for some individuals; it is important for homeowners to take their particular financial situation into consideration. If a homeowner does not have enough tax liability to capture the full amount of the federal tax credit the lease can be viable. In addition, if the homeowner does not have home equity or poor credit, then leasing could be an attractive way to pay for a solar installation.
In general, solar can help families save money on their electricity bills. However, considering all the possible ways to pay for solar will allow for Rhode Island residents to proceed in a way that will work best for their financial situation.
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