Choosing the right term for your solar loan can be daunting. After all, we’re not talking about picking between which shirt to buy. Solar systems can be expensive and it’s important to pick the loan option that’s best for you now, and best for you later in life. 

If you don’t have a crystal ball to look into, you’re in the right spot. This article will walk you through the different terms and how to choose. 

‍

Comparing long versus short-term solar loans 

If you’ve ever applied for a mortgage, you’re probably familiar with the concept of amortization. Let’s walk through the basics and put it in the context of solar loans. 

Solar lenders typically provide customers a variety of options ranging from as low as 5 year loans to 25 year loans. To put it plainly, the benefit of a longer term loan is that the borrower can spread out their payments over that longer term, reducing the fixed monthly payments you’re on the hook to make. There are trade offs though. Longer duration loans tend to come with higher interest rates and more fees. Over the course of the loan, while you may be paying less monthly, you're almost certainly paying more in total financing costs. 

On the flip side, shorter duration loans tend to be more expensive from a monthly payment standpoint. That’s because your payments are spread out over fewer cycles. For those customers that have access to more cash on a monthly basis, the benefit to a shorter duration loan is that the interest rates and fees are typically less. You’ll pay far less in overall financing costs, which generally increases the overall value to you. 

‍

Choosing the right term  

Choosing the right term is really based on the amount of cash you have on hand now, and how much cash you anticipate having on hand later. Longer term solar loans tend to be the most popular because they put less financial stress on the homeowner month after month. They also tend to approximate the cost of the homeowner’s utility bill, which means no extra out-of-pocket expenses if you’re counting your pennies. 

You may want to consider a shorter duration loan if you can count on monthly cash flow to repay your loan. As the shortest loans are generally 5-7 years, it’s hard to see that far into the future, so be careful that you don’t count your chickens before they’ve hatched. You may find yourself in between jobs or with unexpected big personal expenses and you may wish you picked the longer loan type. 

‍

Optimize for low mandatory payments and the flexibility to prepay sooner 

Imagine you’ve got a great job and some excess cash to put into your new residential solar system. But you make the smart decision to take out a 20-year solar loan with Atmos. Your mandatory monthly payments will typically match or be very close to your monthly utility bill. 

Even though your fixed payment amounts are low, you decide to start paying off more of your Atmos solar loan while you’ve got the cash. Every payment in excess of $500 triggers a re-amortization of your loan, reducing your principal balance over the same monthly schedule, lowering your mandatory monthly payments before your eyes. 

A couple years down the road you decide to take some time away from work to spend more time with your family. While you’ve got enough cash to be comfortable, maximizing your free cash flow every month suddenly becomes a lot more attractive. Because of those prepayments you made earlier, your mandatory monthly costs to pay down your loan are now well below your old utility bills. Your solar system is generating free cash flow for you every month! And you’ve got as much flexibility as you need to pay off your loan over the longer term.

‍