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.
Installing solar panels on your home can significantly reduce your energy bills while also helping the environment. But the upfront cost of purchasing and installing a solar system can be daunting leaving many homeowners wondering how to pay for it. The two most common options for financing residential solar panels are taking out a solar loan or signing a solar lease agreement. But which one is the better choice?
In this comprehensive guide, we’ll compare solar loans vs leases to help you decide which solar financing option makes more sense for your home and budget.
How Do Solar Loans and Leases Work?
Before diving into the pros and cons, let’s quickly overview how each solar financing option works:
Solar Loans
- You borrow money to purchase a solar system for your home. The system belongs to you.
- Loans can be secured or unsecured. Secured solar loans use your home as collateral. Unsecured loans do not.
- Interest rates are typically between 3% to 8% and loan terms range from 10-20 years.
- You claim all tax credits and incentives since you own the system.
Solar Leases
- A solar company installs a system on your home for little or no money down. They own the system.
- You pay a fixed monthly rate to essentially “rent” the panels for usually 20 years.
- Escalator clauses often increase the monthly rate by 2-3% each year.
- The solar company receives tax credits and incentives since they own the system.
Now let’s do a deeper dive on the key differences,
Solar Loan Pros
You Own the System
Taking out a solar loan means you own the panels on your roof, not the solar company. This comes with two major benefits:
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Greater Long-Term Savings – Owning your system means you keep all the energy produced after the loan is paid off. With a lease, you lose those savings when the term ends.
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Adds Home Equity – Solar panels owned outright can add $15,000 or more to your home’s value. Leased systems add no value.
Tax Credits & Incentives
When you own your solar system, you can take advantage of tax credits and incentives like:
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Federal Solar Tax Credit – 26% of the system cost through 2032. Saves the average homeowner about $6,500.
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State/Local Incentives – Vary by location, but save homeowners an average of $1,000.
With a leased system, the solar company gets these incentives since they own the equipment. Lower long-term costs make owning a system much more valuable.
Flexibility & Control
With a solar loan, you have complete control over your system:
- Choose your own equipment and installer.
- Decide exactly how many panels you need.
- Add batteries or EV chargers anytime.
- Keep producing solar energy if you move.
Leased systems limit flexibility since it’s not your equipment. Plus, leased panels make selling a home more difficult.
Solar Loan Cons
While very advantageous overall, solar loans do come with a few downsides:
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Higher Upfront Cost – Loans require excellent credit (650+ score) and 5-20% down. Leases require little or no money up front.
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Debt Obligation – Loans add another monthly bill for 10-20 years. Defaulting can put your home at risk. Leases have no credit requirements and can be cancelled anytime.
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Interest Payments – Loan interest rates typically range from 3-8%, adding to the overall cost. Leases have no interest.
For homeowners who don’t have much upfront capital or don’t want another monthly bill, leases can seem more appealing. But as we’ll see next, leases come with major hidden costs.
Solar Lease Pros
Little or No Money Down
The main advantage of solar leases is zero or very low upfront costs. Instead of shelling out tens of thousands of dollars like buying a system, you simply sign a contract and start saving on energy right away.
Solar leases are also easier to qualify for since they don’t require home equity or good credit like loans. If you don’t have the cash or credit score to buy a system, leasing opens the door to solar energy savings.
Fixed Monthly Payments
Leases offer fixed monthly payments for the term of the agreement, usually around 20 years. This makes budgeting easy and predictable. Your monthly lease payment combined with reduced energy bills is often less than just paying the utility company each month.
Of course, this doesn’t factor in escalator clauses that increase the monthly rate by 2-3% annually. More on that next…
Solar Lease Cons
While enticing at first glance, solar leases come with major financial drawbacks:
Lower Lifetime Savings
Leasing provides very modest energy savings compared to buying a solar system:
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Smaller Systems – Since they own the equipment, leasing companies minimize costs with smaller solar systems.
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Escalator Clauses – Monthly lease payments often increase 2-3% yearly, greatly reducing savings over time.
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No Ownership – When the lease ends, you lose access to free electricity.
Buying a system outright provides 2-3x more lifetime savings for the average homeowner.
Hassles Selling a Home
Leased solar systems can complicate or outright prevent home sales. Since the solar company owns the equipment, buyers may be scared off by assuming the lease or having panels removed.
Homes with purchased solar systems sell faster and for around 4.1% more. Leased systems often must be bought out to sell the house.
Fewer Tax Benefits
The solar company gets the 30% federal tax credit plus state/local incentives since they own the equipment, not you. Less incentives means leased systems ultimately cost more.
Hidden Fees & Penalties
Read the fine print! Solar leases often contain hidden charges for:
- System removal or relocation
- Early termination or buyout fees
- Late payment penalties
- Annual fee escalators
These fees can really eat into any energy savings. Homeowners with purchased systems avoid all these extra costs.
Is a Solar Loan or Lease Better?
While leasing lowers the barrier to entry, solar loans provide vastly greater lifetime savings and value. Here’s a quick recap of the key differences:
Solar Loans
- Own the system – more long term savings
- Keep tax credits & incentives – lower cost
- Flexibility & control over equipment
- Adds home value
- Interest payments
Solar Leases
- Lower upfront costs
- Fixed payments
- No home equity required
- Less long-term savings
- No tax benefits
- Less flexibility
- Can complicate home sales
Still unsure which is best for you? Reach out to a Solar.com solar advisor for a free consultation. They can provide custom quotes for both buying and leasing solar to help you make the right decision.
The bottom line is that purchasing a solar system outright or with a loan provides 2-3 times more lifetime financial benefit for most homeowners. While leasing has its advantages like lower upfront costs, the long-term savings are much lower.
Ready to get a custom solar estimate for your home? Simply enter your address to instantly compare loans and leases from top-rated local solar installers.
Solar Loans vs. Solar Leases: An Overview
Before making a decision, it is important to know what each of these financing options entails.
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.
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.
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.
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.
Your Solar Decision: Lease vs. Buy (…or PPA) for Maximum Benefit
What is a solar lease?
You can think of a solar lease like a car lease – it’s a form of third-party ownership (TPO) where you don’t own the product that you’re paying for. Under a solar lease, this third-party owner (e.g., a solar company) installs solar panels on your property and then sells you the electricity produced at a predetermined monthly rate.
What is the difference between buying and leasing solar panels?
When it comes to solar panels, there are **three major differences** between buying and leasing: 1.**Ownership**: – **Buying**: If you purchase a solar system, either with cash or a loan, you own the
Should you lease solar panels?
One of the biggest perks of leasing your solar panels is not having to perform maintenance. Most third-party leasing companies offer maintenance and upkeep as part of your lease. Because you don’t own the solar panels in a solar panel lease, the solar lease won’t add value to your home.
Are solar loans better than solar leases?
Solar loans also lead to more savings than solar leases over the lifetime of your system because lease terms are often longer and can include escalating payments where your electricity rate still increases every year, canceling out the benefit of going solar in the first place.