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Secured or unsecured solar loan: which is right for you?

There are many different types of solar loan products that you can use to finance the installation of a solar panel system. But despite the plethora of options, you can generally bucket all these loans into two broad categories: secured solar loans and unsecured solar loans.

Secured vs. unsecured loans: the highlights

Benefits by loan type Secured loansUnsecured loans Lower interest ratesQuick approval process Interest payments are tax deductibleNo property lien required No hidden feesPlenty of $0-down options

Secured solar loans

With a secured solar loan, your lender will require that you promise an asset–usually your home–as collateral for the money you borrow. This essentially provides “security” to the lender in case you can’t repay the loan. So, if you take out a secured loan and default on payments, the lender holds a lien on your property that allows them to take possession of it to pay off the loan.

Secured loans overview

  1. Popular secured loan types Include home equity loans and lines of credit, FHA loans, and PACE financing. Local credit unions and national lending institutions also offer solar loans.

  2. Secured loans typically have lower interest rates than unsecured loans.

  3. For many types of secured loans, interest is tax-deductible.

  4. Secured loan options usually require significant equity in your home, a strong credit rating, and favorable debt-to-income ratio.

  5. If you finance with a secured loan, the lender may be able to repossess your home if you default on payments.

  6. Secured loans often have a longer closing process (up to several weeks).

Because secured loans use your home (or another asset) as collateral, secured loan lenders assume less risk than they would if your loan was unsecured. Because of this, many secured loans have lower credit score requirements than their unsecured counterparts. Additionally, many secured solar loan providers don’t require any money down, and most do not impose any prepayment penalties should you decide to pay off your loan early. One of the biggest advantages of a secured loan is the tax benefits: interest paid on many types of secured loans (e.g. home equity loans and home equity lines of credit) is tax-deductible.

A secured solar loan may be right for you if…

  1. You are primarily concerned with long-term loan value, rather than short-term cash flow.

  2. You want to maximize the financial benefits of your solar panel system.

  3. You have enough home equity to pay for a solar power system, and are comfortable with using your home as collateral.

  4. You have a tax liability large enough to take advantage of tax deductible interest.

  5. You can wait a few weeks to close the loan.

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 term. 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.

FHA loans

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 installation. However, unlike with 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 for up to 90 percent of any given loan.

Property Assessed Clean Energy (PACE) loans

Some local governments provide PACE financing for solar and other home energy projects. The capital for the loan is provided by a public agency, and you repay the loan through assessments added to your property tax bill over the course of 10 to 20 years.

As of 2019, 36 states plus Washington, D.C. have enacted legislation that authorizes PACE programs.

Unsecured solar loans

With an unsecured solar loan, you can borrow money from a lender to install a solar panel system without putting a lien on your house. The penalty for defaulting on the loan is smaller – they do not require collateral, and the lender cannot foreclose on your home. However, this comes at a price: because they are riskier options for lenders than their secured counterparts, unsecured loans often have higher interest rates.

Unsecured soar loan overview

  1. These loans do not require your home as collateral.

  2. They’re a good option if you’re unable or unwilling to use a secured loan.

  3. Unsecured loans have less long-term value than secured loans.

  4. If you default on an unsecured loan, the lender can hire a collection agency and ding your credit score.

  5. Unsecured loans may have hidden origination fees.

  6. Unlike with secured loans, interest paid is not tax-deductible.

  7. You can be approved for an unsecured loan in minutes.

Finding an unsecured loan with good value is well within reach. Many unsecured loan providers ask for no money down and won’t charge interest on any money you get back from the investment tax credit (ITC).

An unsecured solar loan may be right for you if…

  1. Your priority is to maximize your cash flow in the short term

  2. 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

  3. You are not comfortable with using your home as collateral

  4. You don’t have the tax liability to take advantage of tax-deductible interest

Key questions to ask about your loan options

Still aren’t sure which is the right type of loan for you? Ask yourself these questions:

Secured solar loan questions

Are you willing to use your home as collateral?

While a secured solar energy loan will have lower total costs than an unsecured loan, you have to be willing to use your house as collateral. If your financial outlook is uncertain or if you are concerned about your ability to repay a loan, a secured loan may not be for you.

Do you have enough home equity?

Banks use the balance that you owe on your first mortgage and your home’s appraised value to determine the loan amount for a home equity loan. If you’ve already borrowed against the equity in your home, or still owe most of your mortgage, you may want to consider an unsecured loan or a solar lease/PPA.

What are the interest rates for secured loans?

Typically, interest rates on secured loans are lower than those of unsecured loans because they are backed by your home. Your secured solar loan will likely have an interest rate between 3 and 8 percent, depending on your credit score.

What are the terms for secured loans?

Second mortgages typically have term lengths of 10 to 15 years, although some can be as long as 20 years. Loans with longer term lengths have lower monthly payments, but you will pay more in interest over the term of the loan. Be sure to compare your financing options to find the right product for your needs.

How do the overall economics compare to unsecured loans?

Secured loans generally have better interest rates and term lengths than unsecured loans. Assuming your financial situation is secure, you can get a loan that allows you to start saving money right away.

What are the fees for secured loans?

Banks charge approximately $1,000 of fees for secured loans for solar panel systems, which can include:

  1. Property appraisal fees

  2. Application fees

  3. Closing costs such as attorney’s fees, title searches and mortgage preparation and filing

  4. An origination fee, calculated as a percentage of the overall loan

Loans with longer term lengths have lower monthly payments, but you will pay more in interest over the term of the loan.

Unlike unsecured loans, lenders offering secured loans are required to disclose all fees and miscellaneous charges for loans upfront.

How long does it take to close a secured loan?

Second mortgages may take several weeks to close, mainly due to the logistics involved in appraising the value of your home. Some secured loan programs may also require you to complete a home energy audit and make energy efficiency upgrades before the solar panel loan can be approved.

What tax benefits come with secured loans?

As with a first mortgage loan, the interest you pay on home equity loans, home equity lines of credit and FHA solar energy loans may be tax-deductible, and depending on your tax liability, these tax savings can be substantial.

What happens if you need to sell you home?

With most secured loans (excluding PACE loans), you must pay off the balance of the loan when you sell your home. Secured loans can be repaid at any time without any prepayment penalties. Research suggests that homes with solar panel systems sell at a premium, which can help you recover your initial investment.

Unsecured solar loan questions

Is a second mortgage a better option for you?

An unsecured loan is a better choice than a secured loan if you don’t have enough home equity for a second mortgage, if you would rather save your available home equity for other purchases, or if you are not comfortable using your home as collateral.

What are the interest rates for unsecured loans?

Unsecured loans generally have higher interest rates than secured loans. Sometimes contractors “buy down” the interest rates of unsecured loans, which may result in significant hidden mark-ups in the loan amount. By directly comparing your financing options on the EnergySage Solar Marketplace, you can easily determine total costs associated with secured and unsecured loan options.

What are the terms for unsecured loans?

Unsecured solar energy loan terms can run from 5 to 20 years. Loans with longer terms have lower monthly payments so you can start saving right away, but you may end up paying more interest over the course of the loan.

How do the overall economics compare with secured loans?

Because unsecured solar panel loans do not require collateral, they are higher risk for lenders. As a result, unsecured solar panel loans cost more and have lower overall financial benefits than secured solar panel loans. You can still take out unsecured loans that allow you to start saving right away by dramatically reducing your electricity bill.

What fees are associated with unsecured loans?

Unsecured solar loans with low interest rates may have significant mark-ups or come with undisclosed fees that the solar installer pays to the bank or lender. More often than not, these fees do not appear as a line item on solar loan quotes. These fees can vary dramatically and can be significantly higher than secured loan fees.

How long does it take to get an unsecured solar loan?

Lenders approve unsecured loans quickly – often in just minutes. Secured loans usually take much longer to close.

What happens if you want to sell your house?

Because unsecured loans are not tied to your home, you can sell your home and move before the end of the loan term. However, you are still responsible for paying the loan off. As with other personal debt, unsecured solar energy loans stay with the person, rather than the property, and can’t be transferred to the new homeowner.

Are there tax benefits for unsecured loans?

Unlike secured loans, the interest on unsecured solar loans is not tax-deductible.

What happens if you default on an unsecured loan?

You will not lose your home, but your credit score may be impacted if the lender reports your non-payments to credit rating agencies.

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