Head of Operations
Director of Installers
What is a Solar Loan?
October 28, 2019
In this week’s livestream, Patrick and Rex discuss the ins and outs of solar loans: What is a solar loan? How do you qualify for a solar loan? What different types of solar loan are available? How do the ITC and other incentives factor into a solar loan? Find out in the livestream up top, or continue reading:
So, What is a Solar Loan?
It can be pretty confusing sometimes. Often when someone is considering going solar, there are concerns about the initial cash outlay needed to pay for the system. Understandably, not everyone can afford to shell out $22,000 (the average price of a solar system) out of pocket in cash. That’s where solar loans come in. It’s important to remember that the main goal of going solar for most customers is to pay less for electricity than they are currently paying. Qualified Pick My Solar customers will have access to zero-down financing options, which means that usually the loan payment will be less expensive than the current electricity payment. In the rare case that the loan payments are more expensive than the current cost of electricity, it is very likely that future rate hikes will push electricity costs to, and over, the cost of the loan payment over the course of the 25 year term. The bottom line is that solar loans allow homeowners to purchase a solar system with zero upfront cost, pay it off over time, and hopefully save money day-one.
What is: APR %? Buy Down Rate? Term Length?
These are terms that most homeowners should already be familiar with (unless they bought their house in cash, in which case they should probably consider paying cash for their solar system!) Each term is a factor in the loan. They are variable, they interact together, and at the end of they day each of them affect the monthly payment on a loan. One of the benefits of using a solar marketplace like Pick My Solar or Solar.com is access to many different installers and vendors, allowing you to pick a financing option with the perfect combination of APR, buy down rate, and term length.
APR (Annual Percentage Rate): From Investopedia.com: An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment.
Buy Down Rate: This is simply the rate at which you are buying down the loan. Thus, the higher your buy down rate is, the higher your monthly payment is, and the lower your term length is.
Term Length: This is inversely correlated with the buy down rate – that is, the longer your term length is, the lower your buy down rate is, and vice versa.
How Do I Qualify for a Solar Loan?
Any time you get any kind of loan, you can expect your financier to look into your financial history a little bit. There are three major things in your financial history that financiers will want to know before granting you a solar loan.
Credit Score: Generally in order to qualify for a solar loan, you need a credit score of 640 at the minimum. This might come with a less-than-optimal APR, but you would still be able to go solar and save money. A 720 credit score is optimal for a solar loan, and is the point above which a better credit score probably won’t translate into a better loan.
DTI: The financier will also look at your DTI, or Debt to Income ratio. As long as your DTI is below 50%, you shouldn’t have much trouble getting a solar loan. Conversely, a DTI over 50% may cause problems, but can still work out in certain cases.
Recent Bankruptcy: The last major thing that financiers will want to know about is whether or not you’ve experienced any recent bankruptcies. This, your credit score, and your DTI, all influence the quality of your financial history, and by extension your eligibility to take out a solar loan.
Solar HELOC (Home Equity Line of Credit)
A HELOC, or Home Equity Line of Credit, can potentially be a great way to finance going solar. Typically this is an ideal option if you already have a HELOC for other renovations, and have a few thousand dollars of it that you’re willing to put toward your system. If you’re already putting in a pool, redoing your kitchen etc., and you want use leftover money from that project to go solar, this could be the best choice for you. However, since there are such great financing alternatives, it is not recommended to take out a HELOC just for solar.
Re-amortization loans are one of the most popular types of solar loan. In solar re-amortization loans, you get one free re-amortization, in which you can buy down the principal of the loan and lower your monthly payment. This is designed to allow you to claim the federal solar ITC (Investment Tax Credit) during tax season (30% of your total system cost at the time of this writing), and put that money back into your loan. You would start at a certain monthly payment which reflects 100% of your total system cost. Then, when tax season rolls around the next year, you would claim the ITC, put that money back into your loan, and have a new, lower monthly payment that reflects only 70% of your total system cost. Additionally, you can put out-of-pocket money or other state incentives in when you re-amortize, dropping your principal and monthly payments even more.
For the majority of our customers, this new re-amortized loan payment is significantly lower than the price of electricity from the grid. Not only that, but after re-amortizing, your payments are fixed for the entire term of the loan. This means that as electricity rates keep rising, and they’re rising exponentially year over year, your payment stays low and fixed. It is also important to note that you don’t have to put the entire ITC back into your loan. You can keep the 30% credit for yourself, or re-amortize with whatever fraction of it you see fit.
Same as Cash Loans & Combo Loans
The other two most popular solar financing options are same as cash and combo loans.
Same as Cash Loans
Same as cash loans are a great option for homeowners who want to buy their solar system in cash up front, but don’t want to pay for the entire cost of the system at once. You would pay the net cost of your system up front, which is the total system cost less any applicable state or federal incentives. For example, if your total system cost was $35,000, your net system cost would be $35,000 minus the $10,500 ITC (30% of the total system cost), minus any other state incentives you might qualify for. In this case, assuming no other state incentives, your net system cost would be $24,500, which you would pay in cash toward the system. The remaining $10,500 would be financed as a same as cash loan with a term of 12-18 months, no monthly payment, and no interest. The 12-18 month term gives you time to file your taxes and claim the ITC. After claiming the tax credit, you would simply use it to pay off the loan, and your system would be 100% paid for.
A combo loan is essentially the same principal as a same as cash loan, with one key difference: Instead of paying off the net system cost in cash, you would take out a loan for that amount. Then when you claim your tax credit, you would use it to pay off the other portion of the loan. In the example used above, this would translate to two loans: one for $24,500, with a longer term, and low payments compared to a $35,000 loan, and one for $10,500 with a 12-18 month term, that you would pay off immediately after claiming the tax credit. This ensures that you start with the lowest payment possible, and assumes that you are definitely going to use the entire tax credit to pay down the smaller loan within its 12-18 month term. One important thing to note is that failure to pay off the smaller loan within the designated term can lead to heavy fees and backdated interest. This is true of both combo loans and same as cash loans. We would only recommend a same as cash or combo loan to someone who is 100% certain that they will use their tax credit to pay off their short-term loan. If you’re not sure if you have enough tax liability to claim the entire ITC in one year, or you’re not sure how you’d like to utilize the ITC, a different option may be best for you.
Have a question for our team? Leave us a comment in the video above and we’ll get back to you next week!
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