Updated: Mar 18, 2024

Should You Use a Personal Loan to Pay for Solar Panels?

Find out if you should take out personal loans to pay for solar panels after considering other financing options for solar panel systems and installation.

Written By Thomas (TJ) Porter

Finance Expert

Contents

Adding solar panels to your home can be a good idea for multiple reasons.

You might want to help reduce emissions that harm the environment, instead relying on renewable energy. Or, you simply want to save money on your electric bill.

Regardless of the reason, solar panels can be a good investment that saves you money and increase the value of your home.

Now:

Solar panels are not cheap. You might not be able to pay for them up front.

If you’re thinking about adding solar panels to your home, you might consider applying for a personal loan to finance the purchase.

While this is an option, it shouldn’t be your first one.

Why You Shouldn’t Use Personal Loans First

There are a few reasons that you should not immediately turn to a personal loan if you want to finance the purchase of solar panels.

Higher interest rates

While many online lenders provide great interest rates on unsecured personal loans, they can be expensive, especially if you don't have great credit.

The reason for these high costs is understandable.

The only guarantee that the lender has is your promise to pay back the loan.

If you don’t pay back your loan, it’s not like a mortgage where the lender can foreclose on your home.

This makes personal loans risky for lenders.

Cheaper options available

There are other types of loans that you can use to install solar panels.

Often, these specialized solar panel loans are noticeably cheaper than personal loans.

Among the most popular way to finance solar panel installation is purpose-made solar panel loans.

These loans often use either the value of your home or the panels themselves as collateral and they’re designed with solar panel installation in mind.

Furthermore:

Solar panel loans tend to have longer repayment terms (10+ years) while personal loans typically have 3- to 5- year repayment periods.

Solar Panel Financing Options

When you’re thinking about purchasing solar panels for your home, consider these financing options.

1. Specialized solar panel financing

Specialized solar panel financing is exactly what it sounds like.

There is an entire lending market designed for people who want to install solar panels on their home.

These loans are commonly offered by:

solar panel manufacturers
solar panel installers
banks
credit unions
online lenders

Even if the lender you’re looking at doesn’t offer specialized solar panel loans, ask for a green discount. You might find that they can cut you a deal once they know your plans for the money.

What makes these loans different from other loans?

These loans are usually secured. That means that you provide some form of collateral that reduces the lender’s risk.

In many cases, the solar panels themselves are the collateral for the loan.

If you don’t pay your bills, the lender can repossess the panels and put them to use elsewhere.

Other times, you’ll use the value of your home as collateral.

The loans are also designed with terms that fit the lifecycle of solar panels.

Solar panels last a long time and often take a while before they pay for themselves. Specially-designed solar panel loans often have a longer term, and lower monthly payments, than other loans.

Finally:

Solar panel installers often get a kickback if they’re able to refer you to a financer, so they or the financer can offer you a good deal if you accept financing through the installer or manufacturer.

2. Home equity loan or HELOC

Home equity loans or home equity lines of credit (HELOCs) are another popular way to finance the purchase of solar panels.

Home equity loans give you a way to access some of the value of your home. You use your home as collateral for the loan, which means that the lender can offer incredibly low interest rates.

Typically, you can use the money that you get from a home equity loan or HELOC for nearly any purpose.

Given that you’re using the value of your home to get the loan, why not use the loan to improve your home?

Get a quote for the installation of the solar panel system, then visit your bank to apply for the HELOC or home equity loan.

Again, ask if your bank offers green discounts, as you might be able to save more.

3. Government programs and tax perks

Depending on where you live, your local or state government may offer loan programs and tax perks to help you pay for the installation of solar panels.

Check your town, city, and state government website to see if there is any information about solar panel loans or incentives.

If there are, these deals can often be better than anything a typical lender can offer.

Even if you do go with a normal lender, you might still be eligible for tax perks.

4. PACE programs

Property Assessed Clean Energy Financing (PACE) is a program designed to help people invest in improvements for energy efficiency, renewable energy, and other environmental projects.

PACE programs exist nationally, but are administered locally and to help them meet specific local needs.

PACE can cover up to 100% of a project’s costs, with repayment timelines of up to 20 years, making them a great way to finance solar panels, which often have a long life and take a long time to pay for themselves.

Even better:

You repay your loan as part of your property tax bill. The bill will go up until the loan is paid off, but that means that you don’t have to worry about getting a new bill every month.

Check with your local government to see if it offers a PACE program that you can use.

5. Credit card

Generally speaking, using a credit card to pay for solar panel installation is a bad idea.

Credit card interest rates are huge, making it incredibly expensive to use them to borrow money.

The only time it makes sense to use a credit card is if you’re taking advantage of an introductory 0% APR offer.

If you are confident that you can pay the full amount of the loan off before the end of the 0% financing deal, you can get an interest-free loan.

If you don’t pay the bill in full before the promotional period ends, you’ll be left with a loan with a huge interest rate, which may be tough to handle.

When to Consider Personal Loans for Solar Panels

So, when does it actually make sense to use a personal loan to pay for solar panel installation?

Avoiding collateral

One situation where it might make sense is if you are very opposed to tying collateral to the loan.

Most solar panel financing deals require using the panels themselves or, more commonly, your home as collateral.

If you own your home and don’t have a mortgage, you might be hesitant to use it as collateral for another loan.

In the worst case, you might wind up with a foreclosed home just because of missed payments on a solar panel loan.

Don't qualify for special solar panel financing

If you cannot qualify for a specialized solar panel loan or if you can’t find a loan with a green discount, you might turn to other options.

In this situation, a personal loan can get you the money that you need.

However, if you have trouble qualifying for a solar panel loan, you’re likely to have trouble qualifying for a personal loan that has reasonable rates and fees.

You might want to wait a while, work on your credit score, and try applying for a solar panel loan again before turning to a personal loan.

Don’t Forget the Solar Tax Credit

When you’re installing solar panels on your home, don’t forget about the solar tax credit.

It can help you save a bunch of money on your taxes and is a nice reward for helping to improve the environment.

The federal solar tax credit allows you to deduct up to 30% of the cost of installing solar panels from your income when you file your federal tax return.

There is no cap to how much you can deduct. Depending on your tax rate, this can be a huge savings.

You can even roll the credit over from year to year if your tax liability isn’t enough to use the full credit.

This tax credit is only available to people that own their solar systems.

So:

If you’re leasing a system, you do not qualify.

If you get a loan to purchase your solar panels, you are still eligible for the credit, so make sure to take advantage.

One good idea is to use the amount of your credit to make an extra payment on your loan, helping you save money on interest costs.

Conclusion

Adding solar panels to your home is a great way to help the environment, reduce your electric bill, and improve the value of your home.

While personal loans are one option when it comes to covering the cost, they shouldn't be your initial options.

Look for specialized personal loans or other financing offers that may be cheaper or better suited for buying solar panels.

About the author Thomas (TJ) Porter

TJ Porter has in-depth experience in reviewing financial products such as savings accounts, credit cards, and brokerages, writing how-tos, and answering financial questions. He has also contributed to publications and companies such as Investment Zen and Echo Fox. He aims to provide actionable advice that can help readers better their financial lives. Education: B.S. in Business Administration, Concentration in Information Systems from Northeastern University.

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