Exterior Energy & Power Solar

6 Factors In Deciding Whether to Lease or Finance Solar Panels For Your Home

After deciding to go solar, the next choice is whether to lease or finance the solar panel system. Homeowners will want to determine the best fit based on a few key factors.
Melissa Graham Avatar
Lease vs. Finance Solar Panels

Photo: istockphoto.com

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There’s no doubt that solar panels for the home have long-term benefits—they can not only reduce electric bills but also reduce a homeowner’s carbon footprint and dependence on fossil fuels. In recent years, some of the best solar panel companies (such as SunPower or ADT Solar) have made solar accessible by offering installation services across the nation. The cost of solar panels, however, can be pricey, so it isn’t always possible to buy your own solar panels outright.

If this is the case, the decision between leasing vs. buying solar panels is an important one. Choosing either of these options means it won’t be necessary for a homeowner to pay the full cost up front, but each also has its pros and cons. Homeowners will want to wade through the nuances of each option before deciding which route to take.

How Solar Panel Leasing Works

Lease vs. Finance Solar Panels
Photo: istockphoto.com

At the outset, leasing solar panels is not dissimilar to leasing a car. After a solar company determines that a home is suitable for solar, it will draw up a solar panel lease agreement that outlines the terms and conditions of the lease, including lease duration, monthly payments, and any maintenance responsibilities. Instead of paying for the solar panels up front, the homeowner will make monthly lease payments to the leasing company. These payments are often lower than the homeowner’s current monthly electric bill.

It’s a good idea for a homeowner to check whether the agreement is an operating lease or a capital lease; operating leases do not give the lessee ownership, whereas with a capital lease, the homeowner will own the panels at the end of the lease. After a homeowner has established this distinction and signed on the dotted line, the solar leasing company will install the solar panels. It will typically handle all aspects of the installation, including obtaining permits and connecting the system to the home’s electrical panel. Once the solar panels are installed, they start producing electricity.

How Solar Panel Financing Works 

Solar panel financing allows a homeowner to own the solar panels they have installed on their home either through loans or special financing programs through the solar company. Once the panels are paid off, the homeowner will own them outright. Some solar-specific financing programs offer zero-money-down financing or lower-interest loans that are tailored to solar energy projects. Homeowners will want to do some research to find the best solar panel loans for their needs and situation, as there are a number of types of loans to choose from:

  • Secured loans: These loans use the solar panels themselves or the property as collateral. They often come with lower interest rates since they’re secured against an asset.
  • Personal loans: Borrowers can take out a personal loan from a lender who decides how much to lend them based on their credit score, income, and any current debt they may have. Interest rates can range from 6 to 36 percent.
  • FHA 203(k) loan: This type of loan enables homeowners to roll the cost of solar panel installation into a new or refinanced mortgage. They’ll have to pay the rate of their mortgage loan for the duration of their mortgage, which is typically anywhere from 15 to 30 years.
  • Home equity loans: Homeowners may want to research some of the best home equity loans, such as those offered by U.S. Bank or Flagstar Bank. These loans allow homeowners to use the equity in their home to finance solar panels, which can be a cost-effective option. The interest rates might be lower than those of other unsecured loans, and the interest could be tax-deductible.

1. While both leasing and financing solar panels can help homeowners save on energy costs, those who finance their systems typically see higher long-term savings than those who lease. 

One of the biggest considerations homeowners need to take into account when choosing between leasing vs. owning solar panels is the long-term cost. With solar panel financing, the savings potential is typically higher. Once the solar panel system is paid off, the electricity generated by the solar panels is essentially free (aside from any maintenance costs). This can lead to significantly higher savings on energy bills compared to leasing, where homeowners might have a fixed rate or continue to pay for electricity generated by the leased panels. However, for those who don’t have the cash to pay for a down payment or the higher initial costs associated with financing, leasing solar panels may be a better fit.

Financing Solar PanelsLeasing Solar Panels
Higher up-front costsLittle or no up-front costs
Major reduction in electric billMinor reduction in electric bill
Loan payments cease when paid offPayments continue through lease term
Higher savings in the long runLower savings in the long run

2. Monthly payments for a solar loan are likely to be fixed, but leases have the potential to increase in cost over the course of the agreement. 

For those who decide to finance their solar panels, the monthly payments will likely be fixed for the duration of the loan term. This means that the borrower will pay the same amount every month until the loan is paid off, which can make budgeting easier since it’s possible to anticipate monthly expenses for the foreseeable future.

Lease agreements, on the other hand, can have clauses that allow for annual increases in solar lease rates, known as escalator clauses. These escalations can be tied to various factors such as inflation, increased energy costs, or a predetermined annual percentage increase. Due to these escalator clauses, the monthly lease payments have the potential to increase over time. While initial lease payments might start at a rate lower than a homeowner’s current energy bill, they could rise annually, impacting the overall cost of the lease.

Lease vs. Finance Solar Panels
Photo: istockphoto.com

3. Solar panel owners may also be eligible for incentives and rebates that will not be available for homeowners who choose to lease.

Homeowners who choose to purchase a solar panel system can benefit from the Federal Investment Tax Credit (ITC), which allows them to claim a credit of up to a certain percentage of the cost of their solar installation against their federal taxes. In August 2022, this federal solar tax credit was increased to 30 percent of the system’s cost for installations that take place between 2022 and 2032. The ITC can vary from year to year, so it’s best for homeowners to check the most current information for updated percentages. Depending on their location, homeowners may also be eligible for state solar tax credits.

Once installed, a solar panel system starts generating Solar Renewable Energy Certificates (SRECs), which are created for every megawatt-hour of electricity produced by a solar power system. These certificates serve as proof that a certain amount of electricity was generated using solar power and can be bought, sold, or traded in markets where such certificates are recognized. Solar panel owners can sell these SRECs to utilities or other entities that need to meet their renewable energy obligations. The price of SRECs can vary depending on market conditions, supply and demand, and specific state regulations. It’s worth considering that because those who rent solar panels do not own their systems, they will not be able to take advantage of these benefits.

4. Purchasing a solar system can increase home value, whereas a solar panel lease may make a home less attractive to potential buyers.

Owning a solar system outright is generally seen as an asset that can increase the value of a home. Potential buyers might perceive a property with an owned solar system as more attractive due to the benefits of eco-friendliness and potential long-term savings on utility bills. The value added can vary based on factors such as the system’s size, efficiency, and the local real estate market.

A study by Zillow showed that homes with solar panels sell for an average of 4.1 percent more than homes without solar. Geographic location also plays a role—the study also showed that homes in New York City with a solar panel system had a 5.4 percent value-added, while homes in Riverdale, California, with solar systems increased in value by 2.7 percent.

Potential buyers may also be reluctant about buying a house with leased solar panels since the buyer would need to qualify for and take over the lease. This might be seen as an additional financial burden or a complicated transfer process. Leases often have terms that last longer than the average time people stay in a home, and buyers might be cautious about assuming responsibility for a lease that may not align with their preferences.

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5. Buying solar panels may mean paying for occasional cleaning and repairs, but homeowners who lease are not responsible for maintenance costs. 

Leasing solar panels has pros and cons, but one of the biggest benefits is that in many lease agreements, the solar provider is responsible for the maintenance and repair of the solar panels. This can provide peace of mind for those who don’t want to worry about system upkeep. The leasing company will not only know how to clean solar panels but also how to repair any panels that have been damaged or need to be replaced. Lessees can also call the provider if they notice any change in the performance of the panels and want to have their efficiency evaluated.

Because the best solar panels typically last 25 to 30 years, it’s definitely possible for homeowners to save big time on maintenance throughout the panels’ lifespan since they won’t have to pay for repairs or hire one of the best solar panel cleaning services. And although solar panels are more efficient than ever, they do still lose efficiency over time. According to Paradise Energy Solutions, panels can lose as much as 10 percent of their efficiency in 10 years of use, and 20 percent by the end of their lifespan. Regular maintenance and cleaning can slow this decline, so having a lease provider be responsible for these tasks may result in a longer-lasting system.

It’s also worth noting that those who choose to finance may also save on repair costs through their system’s warranty. For example, ADT Solar offers a 25-year limited workmanship warranty, so while homeowners will still need to pay for regular cleaning, they may not be responsible for the cost of repairs if their system fails to perform as guaranteed.

Lease vs. Finance Solar Panels
Photo: istockphoto.com

6. Leasing is also widely attainable for those who can budget for the monthly payments, whereas homeowners will need to get approval to qualify for financing. 

When a homeowner leases solar panels, they typically make monthly payments to a solar provider. These payments are usually lower than what they would pay for monthly utility bills, allowing them to immediately reduce their energy costs. Leasing is a viable option for those who want to enjoy the benefits of solar energy without the financial commitment of ownership.

Financing, on the other hand, requires a credit check and approval to ensure the borrower has the means to pay for the solar panels over time. When one is financing solar panels, it’s crucial to compare loan terms, interest rates, and total costs, and carefully review the terms and conditions. It’s helpful to consider factors such as the loan term, interest rate, monthly payment, and the total amount paid over the life of the loan.

Additionally, it’s wise for homeowners to check for any potential prepayment penalties or fees associated with early loan payoff. Once the payments are complete, the homeowner will own the solar panels outright and won’t have to fork over any additional cash, assuming there are no major malfunctions. It’s essential for homeowners to consider their specific financial situation and goals before deciding whether to purchase or lease solar panels. Each option has its pros and cons, and one choice may align better with an individual’s needs.

7. Both leasing and financing solar panels can help homeowners save on their energy bills and lower their carbon footprint. 

Because solar panels harness energy from the sun, which is a free source of renewable energy that generates electricity, they reduce a home’s reliance on traditional fossil fuels, such as coal, natural gas, and oil. Those traditional resources come with high energy costs and greenhouse gas emissions that are harmful to the environment. With solar-powered electricity, it’s possible to reduce dependence on grid-supplied electricity and, in many cases, eliminate or significantly reduce electric bills. For those who own their systems, excess energy generated can often be sold back to the grid, earning the homeowner credits or income through net metering programs.

Although the initial cost of solar panels can be high, many homeowners find that solar panels are worth it since the panels have relatively low operating and maintenance costs and typically come with warranties that ensure their performance over time. This long-term investment can lead to substantial savings on electric bills over the life of the system.

8. Homeowners who are still undecided between leasing versus financing their solar system may want to discuss their options with a professional solar panel installer. 

The cost of leasing versus financing solar panels can make a big impact on a homeowner’s budget, so it’s important to choose the option that is the best fit. Those who are still wondering, “Is it better to lease or buy solar panels?” may find that it’s a good idea to consult a professional solar panel installer who can help provide a better idea of what payments would be in both scenarios. The advantages of solar panels are great either way, but an expert in the solar panel industry can share information about the financial aspects of leasing or financing in greater detail than an online solar lease vs. buy calculator could provide. They’ll also be able to explain how many panels are needed to power the home and how much value they will add.

Sources: NerdWallet, EPA, Energy.gov, Zillow, Paradise Energy Solutions