When it comes to solar loans, you have two main options: a secured or unsecured loan. The difference comes down to whether or not you provide collateral to the lender, which determines the loan terms.
While both secured and unsecured loans have their pros and cons, one option may be better for you than the other. In this blog, we’ll share:
- How Secured Solar Loans Work
- How Unsecured Solar Loans Work
- Factors to Consider As You Compare Solar Loans
Let’s start by looking at both types of loans and the pros and cons of each.
Considering solar panels for your home?
Contact Photon Brothers at (720) 370‑3344 (Colorado) or (805) 351‑3371 (California). We’ll send one of our knowledgeable solar engineers to provide you with an accurate solar equipment installation quote and help you explore financing options.
How Secured Solar Loans Work
Secured solar loans are also known as “collateral loans” because they require you to pledge an asset to obtain the loan from the lender. The asset provides security to the lender if you don’t pay back the loan.
The collateral you provide depends on the lender and the type of loan you choose. For example, some solar energy system retailers offer secured loans and require the solar equipment to be used as collateral. If you stop payments for whatever reason, the company can repossess or deactivate the solar panels.
If you choose a secured loan like a home equity loan or home equity line of credit (HELOC), your bank or credit union will require your home as collateral. If you stop payments, the lender may repossess your home.
Even though secured solar loans can have unfavorable consequences if you’re unable to pay back the loan, they typically offer lower interest rates because you (the borrower) are taking on more risk. As a result, secured loans provide better long-term value than unsecured loans.
Pros of Secured Solar Loans
- Lower interest rates than unsecured loans, saving you money in the long run
- Paid interest is usually tax-deductible
Cons of Secured Solar Loans
- Harder to obtain because lenders may require you to have significant equity in your home, a solid credit rating, and an agreeable debt-to-income ratio
- The application and approval process can take up to several weeks to finalize
- If you default payments for whatever reason, the lender may repossess your asset (including your home, if it’s used as collateral)
How Unsecured Solar Loans Work
Unlike secured loans, unsecured loans do not require you to provide collateral to the lender. However, unsecured solar loans typically have higher interest rates because the lender takes on greater financial risk. As a result, your solar panel installation will cost more in the long run if you opt for an unsecured loan over a secured loan.
Even though you don’t have to provide collateral for an unsecured loan, that doesn’t mean you can default on the loan without consequences. If you don’t keep up with the loan payments, the lender can report you to credit reporting agencies, causing your credit score to drop.
Pros of Unsecured Solar Loans
- You do not have to use your home or another asset as collateral to obtain the loan
- The loan approval process is faster — you can often receive an approval within minutes
Cons of Unsecured Solar Loans
- Unsecured loans generally have higher interest rates than secured loans
- Paid interest is not tax-deductible
Factors to Consider As You Compare Solar Loans
When it comes time to compare different solar loan options, you should consider the following factors:
Obviously, you want the lowest interest rate possible so that your energy-efficient solar panels can pay for themselves faster. We explained that secured solar loans typically have lower interest rates than unsecured loans. In addition to the type of loan you choose, the interest rate will also be determined by your credit score. The higher your credit score, the lower your interest rate will likely be.
Most solar loans have a repayment period — the time you have to repay the loan — ranging anywhere from 5 – 15 years.
In general, the longer your loan repayment period, the lower your monthly payment will be. That said, you’ll likely pay more interest for longer loans, which makes your solar installation more expensive in the end.
Ideally, you want to choose a solar loan that strikes a balance between monthly payments you can afford and the shortest possible payback period. That way, you avoid long-term interest costs.
Many lenders offer low or zero-down initial payments for secured and unsecured solar loans. These low upfront cost options can be beneficial if you don’t have extra cash to spend on a down payment. However, if you make a higher initial payment, the loan will likely have a lower interest rate, saving you more money over time.
In addition to the initial down payment, you’ll also want to ask the lender about any fees associated with the loan. These can include application fees, origination fees, and closing costs. Knowing these fees ahead of time will give you a better picture of the total cost of the loan.
Have More Questions About Solar Financing? Call Photon Brothers Today.
Contact Photon Brothers at (720) 370‑3344 (Colorado) or (805) 351‑3371 (California). Our solar engineers can answer your cost-related questions and help you choose the right financing option for your solar panel installation. When you work with Photon Brothers, you can count on expert recommendations and 5‑star customer service during every step of the solar installation planning process.