Hidden terms and conditions in solar loans to be aware of
If you’re in the market for a solar loan, you’ve probably seen lots of loan options.
But if you aren’t a financial wizard (and even if you are!), it can be a bit overwhelming to review each of the options available to you and even more difficult to know which solar loan to go with.
Before you make your choice, there are a few things you should be aware of. This article will walk you through the primary considerations for choosing your solar loan.
Dealer Fees: What are they and why they matter to residential solar
A ‘Dealer Fee’ may not be a term you’re familiar with, but your contractor/installer certainly is.
A Dealer Fee in the residential solar market is similar to a car loan and it’s where its name originated. It is the amount of money your contactor/installer has to pay to a financing company to offer their customer (you!) a financing option.
And if you don’t have the cash upfront to pay for your new solar system, you may find yourself faced with one of these fees.
Dealer Fees can be as low as 0% and as high as 35% or more (!) depending on the state you’re in and your credit profile.
If you don’t see the term Dealer Fee anywhere in your loan offerings, there is a good reason for that. It’s a term that tends to rub borrowers (you again!) the wrong way and so they are often obfuscated from the loan application process. Just because you don’t see the term doesn’t mean it isn’t there though! The difference between the cash price offered by your contractor/installer and the financed amount offered by a lender is the ‘Dealer Fee’.
How can dealer fees be so high? There are few reasons for this, but here’s the gist: Many financiers charge astronomical dealer fees in exchange for low APRs.
Want to take advantage of that low 1.99% APR? The problem is that those low APRs are not an acceptable return on capital for lenders. Lending companies “buy down” your low rate by collecting those fees up front.
The benefits of a low APR, high dealer fee loan
- A loan with a low APR tends to offer lower required monthly payments. This can be great if you’re trying to get the monthly payments to repay your solar loan to match your utility bill.
The costs of a low APR, high dealer fee loan
- The higher financed amount has a negative impact on your credit score. Next time you’re trying to apply for a loan, lenders will see higher credit balances on your account and may be less willing to extend you another loan option or lifeline.
- Lower overall value (NPV) to you if you pay down your solar loan before maturity. Since you’re essentially paying higher financing fees upfront, homeowners don’t realize the maximum benefit of their solar system unless they keep the loan for the long-term. Otherwise, another loan option may return a higher value to you.
Ensure you have flexibility when it comes to repaying or increasing your loan
One of the other primary considerations to take into account is flexibility.
You’re signing up to repay a significant debt. You may find yourself in a different financial situation 2, 5 or 10 years from now, and so you want to make sure your loan is flexible enough to work for you in any situation. Here are some terms and conditions to ask about:
- Free prepayments. Your residential solar loan is broadly known as an “installment loan”, which refers to a loan class of fixed payments over an agreed upon amortization period. Your loan payments are spread out over that amortization period. In order to reduce those monthly payments, amortization periods for residential solar loans can be upwards of 25 years - the time limit commonly accepted as the useful life for rooftop solar systems. So what’s the problem? For those of you that find yourself in possession of some cash and don’t want to pay costly monthly interest, you’ll want the ability to prepay your loan without penalty. Ensure you can pay down your loan with no fees.
- Automatic re-amortizations when you prepay. Speaking of paying down your loan, you’ll want to make sure your lender is reducing the outstanding balance owed and recalculating your monthly payment. This is not a common feature of most lenders, but it has the potential to provide you increased flexibility and benefit when it comes to managing your solar loan.
- Required prepayments with the ITC. Certain lending structures require borrowers to prepay their loan by the amount of the Investment Tax Credit (ITC) within 18 months of loan issuance. Failure to do so may result in increased interest rates, fees and/or higher monthly payments. Since many borrowers aren’t able to come up with the full amount of the ITC in cash to prepay their loan, looming costs are not uncommon. Understanding your requirements to prepay your solar loan is critical.
- Incorporating O&M. Given your solar system can last as long as 25 or 30 years, you’ll want to make sure you keep it in good working condition. This will help keep your energy costs as low as possible for the long-term. Though long-term service contracts can be expensive, certain companies offer maintenance contracts to ensure your system is meeting capacity factor expectations. Ensuring your lender is willing to help you finance those contracts may serve you, your system and your lender in the long run.
Is your solar loan secured or unsecured?
Some solar loans are secured by real estate. While a real estate secured loan will typically gain you a lower interest rate (less risk to the lender!), it also often comes with some challenges. These types of loans often require costly appraisals and typically take a long time for a bank to underwrite, document and process.
To avoid all of those things, and depending on the state and county in which you live, most solar loans these days are secured by something known as a “UCC-1 filing”. For all those non-bankers out there, that means your solar loan is secured by your new solar equipment and related fixtures.
With a UCC-1 filing or with a real estate secured loan, the presence of the loan is visible on your credit report to all other lenders. Typically, lenders won’t offer truly unsecured loans, especially for those longer term (longer amortization) options.