Solar Buy vs Lease
There are several ways to finance your solar system, each with their own advantages and disadvantages. The options are divided into a few main categories: direct purchase (with cash or a personal loan), and solar leases/PPAs (power purchasing agreements).
Under the former option, the homeowner owns their system and is eligible to claim all tax credits and rebates. With leases/PPAs, homeowners can go solar for low/zero up-front cost, but the installer banks the tax credit and other financial incentives of going solar, which reduces the value of solar for the homeowner in the long run.
|Reduce Energy Bill||Yes||Yes (reduced savings vs. outright purchase)|
|Tax credits and incentives||Homeowner eligible for all rebates and credits||Installer keeps any rebates / credits|
|Upfront costs||Homeowner pays 100% of the system costs up front||Low or no upfront costs|
|Impact on home resale value||Home value increases by $20,000 for each $1,000 offset in annual electricity cost||Value of home does not change; new homeowner must inherit solar lease, which can make it harder to find a homebuyer|
Cash Purchase vs. Loan vs. Solar Lease/PPA: Which is Best?
Leases and PPA agreements can be appealing because they offer homeowners on a budget a way to go solar without paying for the system up front. However, the tradeoff is that the installer keeps a portion of the system's value for themselves, making this the less profitable option for the homeowner in the long run.
Here are the merits for each of the three options:
Buying your system outright is the most cost-effective way to go solar. With a cash purchase, you own your solar power system, which makes you eligible for the solar tax credit - a government incentive that can knock 26% off your total project costs when you file your tax return.
A cash purchase offers the shortest payback period and highest return on investment for going solar. It’s like paying for 25 years of power bills in advance to receive a hefty discount on your electricity costs.
The downside of a cash purchase is that the up-front cost of solar is fairly steep. Home solar systems can range anywhere from $5,000 to $30,000+ when fully installed, or more if you opt to add batteries to your system. Not everyone has that kind of capital to spend up front, but if you do, buying your system outright yields the highest return from your solar panels.
If a cash purchase is not possible, going solar is still very much attainable (and profitable) with a low-interest solar loan. You can secure a personal loan from your bank or credit union, or work with a specialized solar lender like Lightstream to finance your project.
There is a major advantage to financing your project with a solar loan: once your loan is funded, you can purchase your system with cash in hand and retain full ownership of your system. By taking this approach, you are still eligible to claim the 26% federal solar tax credit, along with any other local credits, rebates and incentives available in your area.
How much does taking out a loan impact your solar payback period? Let’s do the math for the example system featured in this article - a 7.2 kW SolarEdge system built by a professional installer, with an up-front cost of $14,311.
- Loan Amount: $15,000
- APR: 6%
- Repayment Schedule: 7 years
- Monthly payments: $219.06
- Total Interest Paid: $3,400.74
With a cash purchase, you could expect to break even on this example system in about 10 years. When you add the interest payments outlined here, the payback period rises to about 12 years.
With solar panels warrantied for 25 years, the bottom line is that investing into solar can be extremely profitable, even taking loan payments into account. If you were to take out this loan to finance your system, you’d still be able to enjoy 13 years of free power from your solar panels, an investment that would save you more than $21k on energy bills in that timeframe.
Of course, the usual disclaimers apply: these figures will vary based on your project details and loan terms available for you. We encourage you to use our guide to calculating solar ROI, alongside Bankrate’s loan calculator, to work out your own figures based on the factors unique to your project.
Solar Leases / PPAs (Power Purchasing Agreements)
Some solar providers offer solar lease or PPA (power purchase agreement) programs. Under these programs, a solar provider installs solar panels on the roof at no up-front cost, then bills the homeowner for the right to use electricity generated by the panels. The solar provider charges a rate that is 15-30% less than utility power, allowing homeowners to go solar with no up-front costs and no accountability for loan payments.
The key drawback to leases and PPAs is that the solar provider who installs your solar panels retains ownership of the system. Though the panels are installed on your roof, you are still paying a third-party provider to use the electricity they generate. Essentially, all you’re doing is moving from a public to a private utility provider for a slightly reduced rate.
Crucially, under these agreements, you don’t own your solar panels ‒ your solar provider does. That means that you miss out on the right to claim the 26% solar tax credit, an incentive that dramatically alters the payback period on your solar panels. While a solar lease or PPA may reduce your electric bills by 20%, a solar loan could potentially cut them in half ‒ while still allowing you to go solar with no money down.
Another drawback of leases and PPAs becomes apparent if you decide to sell your home in the future. Solar panels can increase property value by 3-4%, but that’s only true if you own your solar panel system and can sell it as a feature of the home. If you lease your system from a third-party vendor, you’ll need to find a homebuyer who is willing to inherit the terms of your lease. That can make it much harder to find an interested buyer, and you won’t be able to include the value of solar panels in your home’s listing price.
Since solar leases and PPAs are the least profitable and least flexible way to go solar, we strongly recommend personal loans as the preferred way to finance your solar project.