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3rd-party solar loans: know what you’re getting

Cute house with solar panels

Photo: Senthil Balasubramanian

Say you’ve found a great solar installer, and you’ve gotten a quote that looks good. You’ll be saving oodles of money on your electric bill over the next three decades, but there’s one catch: you don’t have $15,000 to plunk down.

“No problem!” says the salesperson; “We work with a solar loan provider who can finance the installation with no money down, and offer you monthly payments that are smaller than your solar savings over a 12- or 20-year term!”

Wow, that sounds great! Free solar, and all you have to do is sign on the dotted line?

But wait. Ask questions and read that fine print. Even though the loan might work out every bit as well as described, the details matter.

Take it from the reviews of one solar financing company, who describe surprise balloon payments, interest that compounds daily, magically extended loan terms, and poor customer service.

Are we on pace for another Countrywide-esque loan meltdown?

Who are these loan providers?

Solar loan company logos

If you go with one of the big solar companies, the installer may also be your loan provider. Companies like Tesla/SolarCity, Sunrun, and Vivint each offer their own loan products, backed by huge investments from their finance partners. We’re not discussing the big guys in this article. Instead, we’ll focus on 3rd-party providers.

Smaller solar installers don’t have huge industrial investors to back their loans, but instead often work with 3rd-party financing companies. Companies like Mosaic, EnerBank USA, and GreenSky Credit pitch their loan products to home improvement contractors as a way to increase sales by offering homeowners more payment options.

In either case, solar loans can be structured differently from traditional loans, and those differences can cause nasty surprises. A common one is called a “balloon payment,” and if the salesperson from your installation company doesn’t explain it well, you might feel swindled soon after you sign up.

What are balloon payments on your solar loan?

Judging by the reviews we linked to above, some solar customers have been caught off guard by large payments their loan companies expect by a certain date after the loan term begins. In most cases, this date is 18 months after the start of the loan, and the payment can be thousands of dollars.

Why have a balloon payment?

The reason for the payment and the deadline to pay it is unique to installing solar: The Federal government offers a tax credit equal to 30% of the costs of installing the system to all homeowners who purchase a solar installation with cash or a loan.

Some loan providers factor this benefit into their loan products, offering lower interest or monthly payments only if the borrower uses the money from tax credit to pay down the loan.

The provider we mentioned above, Mosaic, offers a product called a “Choice Rate Loan,” with monthly payments that start out low, and continue at the same amount if at least 30% of the balance is paid off by 18 months after the start of the loan.

If instead, you don’t pay the 30% “Choice Rate” payment, your monthly payment will go down. Conversely, if you pay more than the 30% lump-sum, your future monthly payments will go down. Here’s a chart from Mosaic that loosely corresponds to how it all works:

How to pay down your mosaic loan

Why does the loan payment increase?

We reached out to Mosaic for their official word on this, and got a response that included the following:

When the loan first begins, our customers have a particular monthly payment amount, which we call the Choice Monthly Payment. In order to lock in that payment for the whole loan, our customers need to make a 30% paydown to Mosaic in addition to the regular monthly payments within 18 months of the loan being active. Many of our borrowers pay a good amount of federal income taxes and use the 30% Federal tax credit to help with this.

If a borrower doesn’t hit the 30%, the monthly payment amount is re-amortized to a number that is proportionate to how much of the 30% they did get in. For example, let’s say if a customer has a choice monthly payment of $100, and a standard payment of $175 if they don’t contribute anything to the 30%. Let’s say if they did half of the 30% requirement, the new monthly payment would only go up half as much, roughly to $137.50. This also means if a customer contributes more than 30% by month 18 they would end up with a lower monthly payment going forward.

All that is a fancy way to say “your Mosaic loan amount is equal to 70% of the cost of your system, and we’ll float you the extra 30% as long as you can pay it back over the first 18 months.”

In that way, Mosaic is helping keep your payments low over the short and long terms, while making it easy for you to choose to keep some or all of the 30% tax credit for something else. And solar salespeople need to do a better job of communicating how that works.

Here’s a screenshot from a sample of Mosaic’s dashboard, which shows how the payments look before you’ve hit the 30% repayment:

Sample Mosaic loan payment dashboard

As you can see in the image above, the lump sum goes to reduce the principal to that 70% amount expected by the loan terms. Once you’ve hit it, you continue with the same payments as before.

Mosaic also told us that installers set the available terms of the loans offered for their products, from 10 to 25 years, with a few stops in between. And rates are negotiated on a per-installer basis as well.

But for all Mosaic loans, interest is compounded daily, and any payment that is made goes first to accrued interest and second to principal. So if you’re making an extra payment a week after your regular monthly payment, you’ll first pay 7 days’ of accrued interest, with the rest going to reduce your principal balance. Still waiting on word from Mosaic if these kinds of extra payments reduce the interest owed at the time of the next scheduled payment.

If your installer offers Mosaic loans, be sure that you get all the information about what you’ll owe, when you’ll owe it, and how long it’ll take you to pay it off.

An alternative to the Mosaic model

Another loan provider, EnerBank USA has recently introduced a similar loan called PowerLoan, which allows borrowers to request re-amortization of their loan after making a lump-sum payment of at least 15%. This seems to be a more up-front way of doing business, with higher starting monthly payments that can be lowered if you use incentives to pay down the loan.

From what we’ve read about the PowerLoan, the re-amortization is subject to a one-time $150 fee.

Who these types of solar loans work for

Flexible loan payment options are intended to offer people who can take advantage of the 30% federal solar tax credit a way to ensure low payments for the future. Here’s an example:

Jane has a good job in San Diego with a salary and benefits that pays $65,000 per year. She has payroll deductions of $1,000 taken from her check every month based on her expected taxes.

She decides to install a 5-kW solar system on her home costing $15,000, which will produce about $110 per month in energy bill savings.

At the end of the year, she will be eligible for a tax credit of 30% of that cost, or $4,500. Jane elects to take a loan from EnerBank, which has a monthly payment of $99, meaning she’ll save $11/month with solar.

After she gets her tax refund of $4,500 in April of next year, she pays the loan down by that amount and asks EnerBank to reamortize the loan. The remaining balance on the loan would be about $10,200, which would reduce her monthly payment to about $68 for the next 20 years.

So she’ll begin her solar journey saving an average of $42 per month ($110 minus $68), and her savings will continue to increase as the electric company raises rates. She put no money down on the system and still saves money.

If you have steady income and live in a good state for solar, a solar loan can be a great option. But if you’re being pitched a loan without getting crucial information on the terms, it’s possible you’re being taken advantage of.

To avoid problems with loans like this, make sure you’re eligible for the Federal Solar Tax Credit, determine if you’ll be able to apply the amount of the tax credit to the loan balance within the time frame, and find out if there are any fees or penalties for pre-payment.

Who these types of solar loans don’t work for

We love solar power, but sometimes the numbers just don’t pencil out. Despite falling costs to install solar, the federal 30% tax credit is still a huge reason why going solar makes sense for people in much of the country.

If you are unable to take advantage of the tax credit because you’ve retired or are on a low or fixed income, you might not be able to pay off 30% of the cost of your system by the deadline. Some states still have rebates, but tax credits are really where it’s at when it comes to the government rewarding solar buyers.

For people like this, it might be better to check out a lease or Power Purchase Agreement or even Community Solar.

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