There has been quite a bit of press lately about Property Assessed Clean Energy (PACE) programs for solar energy installations. For those who do not have equity in their homes and therefore can not get a “secured” loan, a PACE loan is often a better way to go than an unsecured loan. PACE loans are at around 9% interest vs up to 10% to 12%, if not higher, for unsecured loans.
However, PACE loans are hard to come by. Cities have only put aside a limited amount of money for PACE loans, and when the program “goes live” the loans are often gone in days. Furthermore, to be considered for one of the loans, you need to already have a bid for the solar installation from an installer, and may even also need to already have the appropriate permits in place. PACE loans will make solar more affordable for many home owners who can not get a secured loan, and they are absolutely a great step in the right direction from a policy perspective, but they are not the holy grail when it comes to financing a solar power system.
Unsecured loans that are not secured by a house or similar valuable item are easier to get, but they generally have high interest rates ranging anywhere from 10% – 18%. Banks charge a higher interest for these loans because there is not something tangible like a house securing the loan that they can repossess if the loan is not paid back on time. Banks are taking on more of a risk by giving out unsecured loans, and they are compensated for this risk via higher interest rates. In some cases an unsecured loan can make sense for a solar installation, but often the interest rates are so high that it makes the payback period too long.
A secured loan, mortgage, or second mortgage from a bank is almost always the best way to finance a solar energy system. They have the lowest interest rates, often ranging from 2%-8%. Furthermore, getting a second loan or mortgage from a bank that you’ve worked with in the past (or work with now) helps ensure that you get the best possible rates.
The more subtle lesson here is that unless you have equity in your home and can get a secured loan, it may be difficult for you to get financing that makes financial sense. Property Assessed Clean Energy programs are good, but very hard to come by, and unsecured loans tend to have interest rates that are too high.