As a homeowner, going solar is one of the most important decisions you will ever make. Especially because it comes with quite a (steep) price tag.
There are multiple financing options to fund your solar investment, and loans and leases continue to be two of the most popular choices.
Is one better than the other? Which one should you choose? Let’s find out.
Solar Loans vs. Solar Leases: An Overview
Before making a decision, it is important to know what each of these financing options entails.
Solar Loans
A solar loan is a type of home improvement loan. You make a down payment and pay in installments (plus interest) to recover the loan amount. You can secure such a loan from your solar retailer, bank, or non-banking financial companies (NBFCs).
Bear in mind that the terms and conditions of loans vary from source to source.
You can avail of different types of solar loans. For example, you can get a secure loan by staking collateral and get very low interest rates. Or, you could take a partial “green mortgage” on your recently purchased house.
Another common type of solar loan is offered by the Residential Property Assessed Clean Energy Program (R-PACE), where you can pay the debt amount as property tax over a 10 to 20-year period.
Because going solar increases the valuation of your property by 4.1% on average, you can make good on your solar debt if you plan for it.
Solar Leases
Leases let you borrow a solar setup and use it for your home’s energy needs. You pay a monthly rent to your solar provider for the solar array, and you are free to use all power it produces.
While you don’t own the solar setup, you can still reap the benefits of renewable energy and reduce your utility bills. Solar leases may require minimal to no down payment, depending on your solar provider.
This type of financing is a low-cost option, especially if you don’t want to commit to taking a loan or making a hefty initial investment for your own solar setup.
However, don’t confuse this with solar power purchase agreements (PPAs). Leases have a fixed monthly payment that you need to make, irrespective of the amount of power you produce.
For solar PPAs, the provider sets a fixed rate for every kWh of energy you produce (lower than what your utility provider charges) at the time of signing the contract. You make payments based on this rate multiplied by the energy you produce that month. The “rent” you pay is variable, and so are the savings you make.
So, What’s the Difference Between the Two?
A solar loan or lease will help you enjoy clean and green energy and save on utility bills without burning a hole in your pocket.
However, there are marked differences between the two.
Ownership
One of the most significant differences between a solar loan and a lease is ownership.
If you want to purchase a solar array for your home, a loan will fund your investment. Owning your solar setup gives you complete freedom and control over what you buy, how you set it up, and how you use it. You can go off the grid or remain grid-tied while making the most of your local net metering regulations.
And you can continue to use your solar array for years after you’ve paid off your loan.
Leasing a solar array does not give you ownership rights. The solar service provider you lease it from owns the system and will take care of its maintenance. You only use the power generated by the solar setup for your residential energy needs.
Cost & Savings
The ultimate goal of going solar, apart from switching to a cleaner and greener source of energy, is to save on utility bills. So which of these two financing options will be more rewarding for you?
Whichever gives you better savings per month is the better option for you. Here’s how you can calculate it:
While you do have to make a lump sum down payment for a solar loan, the interest you pay every month is often lower than the rent you will pay for leasing a solar array. You can expect to pay 4% to 7% interest on the loan amount every month. In rare cases, interest rates can go up to as much as 36%.
Compared to that, you may end up paying $50 to $250 every month for a solar lease. The amount you pay varies depending on various contributing factors, like your credit score, local solar provider rates, etc. Taking a 15-year lease into account, you could pay $7200 up to $112,500 to your solar provider.
Compared to that, you can purchase a solar setup for roughly $20,000 after federal tax credit.
In the long run, a solar loan comes out cheaper than a lease in most cases.
The deciding factor here is how much savings you will make per month after paying your loan interest or solar rent. Since many variables are at play here, you need to calculate the difference based on your household’s energy consumption and prices set by your solar provider.
Tax Exemptions & Discounts
Homeowners who have purchased solar PV systems are eligible for a 26% to 30% federal tax credit, depending on the year of their purchase. In addition, most states offer low interest rates for solar loans to encourage adoption. You may also get discounts on your property tax and other kinds of rebates.
If you’re a grid-tied solar user and have signed up for your state’s net metering plans, you may be eligible for Performance Based Incentives (PBIs). There are also Solar Renewable Energy Certificates (SRECs) through which you can earn some money from your utility provider.
You get all these benefits if you purchase a solar array for your home.
Meanwhile, solar leases do not qualify for any such exemptions or discounts. You just have to pay the fixed rate every month for the duration of the lease.
Maintenance
The other obvious difference is that you need to bear all the costs associated with repairing and maintaining solar panels if you purchase them. You should also factor in the expenses for preparing your house for solar installation.
If you opt for a lease, you don’t have to worry about any of this. Your solar provider will take care of the installation, maintenance, and upkeep of the whole system. It is, after all, their product, and they will be responsible for it.
Considering all these factors, you might already be leaning towards solar loans as the better financing option between the two. The good news is that now is an excellent time to go solar—many incentives will work in your favor if you decide to take the plunge.
Begin Your Solar Journey
Solar panel costs have decreased by $50,000 in the last decade, with most models becoming more affordable than ever. When juxtaposed with the rising cost of conventional electricity, residential solar makes a solid case for itself.
If you’ve been deliberating going solar, it’s time to take the final call.
Go solar today. It will be one of the best investments you make for your future.
Authored by Ryan Douglas
NRG Clean Power's resident writer and solar enthusiast, Ryan Douglas covers all things related to the clean energy industry.
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