Is a secured or an unsecured solar loan right for you?
There are a variety of solar loan products that you can use to finance the installation of your solar panel system. They can be divided into two broad categories: secured solar loans and unsecured solar loans. Read on to see which one is right for you.
Secured solar loans
With a secured solar energy loan, your lender will require that you promise an asset, usually your home, as collateral for the money you are borrowing. Your home provides “security” to the lender in the event that you can’t repay the loan. If you take out a secured loan, the lender holds a lien on your property and can take possession to pay off the loan if you default. Organizations that offer secured solar loans include Admirals Bank, Matadors Community Credit Union, and HERO Program.
- Secured solar loans overview
- Includes home equity loans and lines of credit, FHA loans, and PACE loans
- Offered by credit unions and national lending institutions
- Provide lower interest rates than unsecured loans
- Interest is generally tax-deductible
- Requires significant equity in your home (except for some FHA loans), a strong credit rating, and favorable debt-to-income ratio
- Lender may be able to repossess your home if you default
- May take several weeks to close the loan
Because secured loans use your home (or another asset) as collateral, secured loan lenders assume less risk than unsecured lenders. As a result, many secured loans have lower credit score requirements than their unsecured counterparts. Many secured solar loan providers don’t require any money down, and most do not impose any prepayment penalties. The interest paid on secured loans is tax-deductible.
A secured solar loan may be right for you if…
- You are primarily concerned with long-term loan value, rather than short-term cash flow
- You want to maximize the financial benefits of your solar panel system
- You have enough home equity to pay for a solar power system and are comfortable with using your home as collateral
- You have a tax liability large enough to take advantage of tax deductible interest
- You can wait a few weeks to close the loan
Unsecured solar loans
With an unsecured solar loan, you can borrow money from a lender to install a solar PV system without having to use your house as collateral. The penalty for defaulting on the loan is smaller – they do not require collateral, and the lender cannot foreclose on your home. However, they are also riskier for the lender than secured loans, and this can result in higher interest rates. Examples of organizations that offer unsecured solar loans include SunPower, Green Sky Credit, and EnerBank USA.
Unsecured solar loan overview
- Do not require your home as collateral
- Good option for consumers who are unable or unwilling to use a secured loan
Have less long-term value than secured loans
- If you default, the lender can hire a collection agency and your credit score will decrease
- May have hidden origination fees
- Interest paid is not tax-deductible
- You can be approved in minutes
- Finding a good value with an unsecured loan is well within reach. Many unsecured loan providers ask for no money down and won’t charge interest on the 30 percent savings you get back from the investment tax credit (ITC).
An unsecured solar loan may be right for you if…
- Your priority is to maximize your cash flow in the short term
- You don’t have enough home equity to cover the cost of a solar panel system, or you want to save it for other purchases
- You are not comfortable with using your home as collateral
- You don’t have the tax liability to take advantage of tax-deductible interest
Find out the key questions to ask for unsecured solar loans.
Types of secured solar loans
Home equity loan
Often called a “second mortgage,” a home equity loan is a loan that uses your home as collateral. A home equity loan lets you borrow against the value you have accrued in your home since its purchase, and is often used for major home improvement projects. Home equity loans provide a fixed amount of cash, repaid through monthly payments at a fixed interest rate.
Home equity line of credit
With a home equity line of credit, the bank gives you a line of credit via a credit card or checkbook, rather than providing you with the entire loan amount in cash up front. You can draw on the line of credit as needed over an agreed upon period. The interest on both home equity loans and home equity lines of credit is tax-deductible. Most home equity loans and home equity lines of credit have a fixed term length between five and 15 years.
Know your home equity amount
In evaluating a second mortgage option for financing your solar power system, you will need to know your home equity amount. This is equal to the appraised value of your home minus your mortgage balance. For example, if your house is appraised at $200,000 and you still owe $160,000 on your mortgage, your home equity will be $40,000. The more equity you have in your home, the more likely the bank will approve your second mortgage.
Some lenders offer secured loans that are insured by the Federal Housing Administration (FHA). Similar to a home equity loan, FHA-backed loans are secured by your home, and the interest you pay is tax-deductible. They can be used for a wide range of home improvements, including solar panel systems. Unlike home equity loans, if you default on an FHA-backed loan, the bank will not foreclose on your home because it can collect insurance from the FHA up to 90 percent of any given loan.
Property Assessed Clean Energy (PACE) loans
We provide PACE financing for solar and other home energy projects. The capital for the loan is provided by a public agency, and the homeowner repays the loan amount through assessments added to his or her property tax bill over the course of 10 to 20 years.
Because PACE programs extend financing options to homeowners based on home equity, they are a good option for homeowners whose credit scores aren’t high enough to merit favorable home equity loan terms. As of 2015, 29 states plus Washington, D.C. have enacted legislation that authorizes PACE programs.