Borrowing money the old-fashioned way

When people need large amounts of money, they either look to a bank or whip out their credit cards. To finance your big solar projects, you can pursue several types of loans:

✓ Home equity loans are the most common loans and the best options. If you’re contemplating a large solar project, you probably own your own home. (Why would anybody install a big solar system on a home she’s renting?)

In parts of the country where real estate values are rising, homeowners enjoy equity, which is the difference between what’s owed in mortgages on the home and the home’s market value (or appraised value, which should be the same but rarely is). You can use your equity to get a loan at a much lower interest rate because the bank’s risk is greatly reduced by using real estate as collateral (the goods the bank will take if you don’t pay on your loan). The bank won’t need to come after the equip­ment you’ve financed because the bank can go after the house itself (banks generally don’t care what you do with the money, so they may not even know about your solar equipment). Homeowners plan to pay off their debt long before they let a bank take their home away. Home equity loans are generally tax deductible (consult your tax preparer for details).

✓ Supplier loans are available from manufacturers and suppliers who pro­vide solar equipment. However, solar vendors generally sign up with an equity loan broker and simply act as the sales outlet for somebody else’s loans. You can probably find a better interest rate if you go directly to

a bank, but the convenience may offset the cost. Or solar vendors may actually offer better terms because they have a strong incentive to close a sale, and making inexpensive financing available helps considerably.

These companies use the equipment itself as collateral for the loan. Supplier loans are similar to automobile loans that dealerships offer when you buy a vehicle. The car is collateral, and if you don’t pay the loan, a repo man (or woman) comes to your house late at night and takes back the car — perfectly legal. If you default on a supplier loan for your solar equipment, the company may send someone in the middle of the night to grab the col­lectors off your roof — you probably won’t mistake him for Santa Claus!

✓ Consumer loans don’t require any collateral, so the lender’s risk is high. You can get a credit card with a $30,000 credit limit far more easily than should ever be possible. The reason it’s so easy? The interest rate is sky high; the bank expects a number of defaults and lets the customers who don’t default cover the losses from the ones who do. Plus, you don’t get any sort of tax deduction on the interest.

Consumer loans are the modern version of loan shark products, although the creditors no longer break your fingers when you default. If you’re a good credit risk, avoid consumer loans like the plague.

✓ New first mortgages often make sense. Interest rates are very low right now, and if you have some equity in your home, you may be able to obtain a new first mortgage that incorporates the cost of your solar PV system, and the payments may not be any bigger than what you’re making now (since the interest rate is lower). In essence, you’ll be saving on your monthly utility bills, and your mortgage will be the same, so you’re monthly cash flow will be much better. Now you can buy that new car you’ve been dreaming about. This is, among the many alterna­tives, the best way to go, but it all depends on the level of equity you have in your home.

Updated: August 18, 2015 — 1:25 pm