Congratulations on making the decision to go solar! Putting solar on your roof grants you energy independence from clean, renewable energy that is great for the environment and great for your pocketbook. 

Going solar can be a bit overwhelming when you start to look at the financing options. You may have even seen a few low-APR options that seem too good to be true.

This article will help walk you through the basics of how solar lenders calculate your monthly payment, and what APR should really mean for you. 

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Understanding the monthly debt payment on your solar loan

Solar loans are essentially personal installment loans, sort of like the loan you might have gotten with your car or a home mortgage. That means that your loan is typically paid back in fixed monthly “installments” over a finite number of months. 

To put it simply, lenders calculate your fixed monthly payment by dividing the total amount financed by the number of months the loan will be outstanding, while adding in an interest rate (i.e. APR) factor. 

The fixed monthly payment consists of both interest and principal. Each month, you’ll pay the amount of interest owed on the loan for that month. The remaining amount up to the fixed monthly installment is the amount of principal you’ll have paid down that month. For these types of loans, interest payments make up a larger portion of each monthly payment while the total outstanding loan balance is high. As you pay down the principal balance of your loan over time, less interest accrues month and month and more of your fixed monthly installment is used to pay down principal. 

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APR versus Monthly Payment 

While APR is used to calculate your fixed monthly payment for an installment loan, it is not the only factor to take into account. The other, more important, consideration is the amount of the loan. 

In other words, a $50,000 loan with a low APR will have a higher fixed monthly payment than a $25,000 loan with a higher APR. 

So while your APR is an important consideration, in order to find the best loan option for you, you’ll want to focus more on the fixed monthly payment. 

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Choosing the best solar loan option for you

Now that we’ve provided some of the basics, and deprioritized APR, let’s get into how to choose the best solar loan for you. 

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Optimize for monthly payment

When it comes to solar loans, many homeowners target an option that most closely matches their utility bills. And 9 times out of 10, that means choosing the option with the lowest monthly payment. In terms of loans, lowest monthly payment generally comes hand-in-hand with a longer loan term.

Locking in the lowest fixed monthly payment is ideal for customers who don’t want to increase their monthly living expenses. For those that don’t have a crystal ball and who can’t see decades into the future, keeping monthly living expenses to a minimum makes smart financial sense. 

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Optimize for flexibility in repayment and prepayment terms

Low fixed monthly payments are a great way to increase your own discretionary cash month over month, but you’ll want to maintain flexibility to prepay your loan in larger amounts as well. Having the option to prepay your loan when you come into some extra cash is really good for several reasons. 

Reducing the principal balance of your loan (especially in the beginning of your loan) will significantly reduce the interest you’ll have to pay over the life of the loan. That’s a good thing. Make sure that those prepayments are free (don’t accept prepayment fees!) and (this is important!) look for a loan option that will re-amortize your loan with each over-payment. Why? Reducing your mandatory out-of-pocket expenses over time increases the value (NPV) of your investment. 

With the right loan, you’ll lock in a low fixed monthly rate from the beginning and maintain the ability to maximize the value of your solar system when it’s financially feasible for you to do so. This is also known as having your cake and shoving it in your face like a 3 year old at a birthday party. 

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Optimize for long-term partnership 

There’s no doubt about it. Solar loans are long-term debts and you may be stuck with the lender for years to come. For this reason, it’s important to make sure that your values and interests align. You’ll want to partner with a lender that has your best interest at heart at all times. Values-based relationship lenders will usually try to work with you when times get tough or you have other financial goals to meet. 

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Final Words

Installing a home solar system is exciting! You’re on the path to complete home electrification. It can also be really expensive. Choosing the right loan is an important step to generate financial wellbeing over the long-term.

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