Solar loan or cash: the effective rate that decides it

The loan's cost on the cash price is the only rate that matters

A solar loan has at least three rates hiding in it. The first is the note rate, the interest on the unpaid balance. The second is the APR the lender discloses, which Regulation Z defines as the cost of credit as a yearly rate. The third is the one that decides cash versus loan, and no document prints it: the rate at which the stream of loan payments, discounted, equals what the system would have cost if you had simply paid for it. Call it the effective rate on the cash price.

When a loan carries no fee, the effective rate equals the note rate and the exercise is trivial. When the amount financed is larger than the cash price, because a dealer fee or similar charge sits inside the principal, the effective rate is higher than the note rate, sometimes by several points. The same is true when a payment is sized for a prepayment that never happens. Everything else in this guide is an application of that one rate.

You can compute it with three numbers from the paperwork. The cash price comes from a written cash quote for the identical scope. The monthly payment and the number of payments come from the payment schedule and total of payments, which the closed-end credit disclosure must show; Regulation Z section 1026.18 lists the amount financed in paragraph (b), the finance charge in (d), the annual percentage rate in (e), the payment schedule in (g) and the total of payments in (h). Find the rate that makes the present value of those payments equal to the cash price. A spreadsheet's RATE function does it in one line: RATE(number of payments, minus payment, cash price) gives the monthly rate, and multiplying by 12 puts it on the same footing as an APR.

Then comes the comparison, which has two halves. If the effective rate is below the return you would otherwise earn on the cash, after tax and at the same level of risk, borrowing leaves you ahead. If it is above, paying cash is the better use of the money, and the gap is a cost you can state in dollars. The rest of the page supplies the figures to put on each side.

The inputs used in every table below

Every figure that follows comes from one set of inputs, printed here so you can replace any of them with your own. None of these is a forecast for your roof. A roof-specific PVWatts run and your utility's current tariff outrank them, and electricity prices belong to EnergyBS, which is where to look if you want to test a different rate.

Holding the electricity price flat is a deliberate choice. If rates rise, savings rise and every row improves by roughly the same proportion, but this site does not forecast rates. Later, one table adds a 3 percent annual rise as a sensitivity so you can see how much weight that single assumption carries.

What a plain loan costs on $23,600

Start with loans that have no fee, because they set the floor. The table shows the monthly payment and the total interest over the life of the loan for five rates and four terms, computed with standard monthly amortization on the full $23,600.

Two patterns matter more than any single cell. First, term moves the interest bill far more than people expect. At 8 percent, stretching from ten to twenty years lowers the payment by about $89 a month but more than doubles the interest, from $10,760 to $23,776. Second, the same $23,600 at 3 percent over ten years costs $3,746 in interest, which is about a third of the 8 percent figure. The gap between those two cells is what a rate comparison is worth, and it is the number to hold against whatever your cash would earn.

Monthly savings of $200 on these inputs help put the payments in scale. A payment under $200 leaves the household cash-flow positive from the first month. At 8 percent only the twenty-year term gets there, at $197.40, while the fifteen-year payment of $225.53 misses; the 6 percent fifteen-year payment of $199.15 clears it by 85 cents, and the 3 percent fifteen-year payment of $162.98 clears it with room to spare. Cash-flow positive financing in this example requires either a long term or a low effective rate, and the long terms are where the interest is largest. That tension is why the sales pitch usually leads with the monthly payment.

Your cash has a rate too: reading the alternatives

The other side of the comparison is what the cash would otherwise do. For most households that is not one thing but a ladder, and the right rung is the highest-rate debt you owe or the best safe return you could get, whichever is larger. Here is what the public series showed when this page was checked.

None of these is the rate you will be offered on a solar loan. They mark where the break-even sits for different kinds of cash.

Cash that would otherwise sit in a safe account

If the alternative is a savings vehicle paying near the one-year Treasury yield, the hurdle is about 4.5 percent before tax. A loan whose effective rate on the cash price is under that is cheaper than the interest you forgo, and one above it costs you the difference. Interest on savings is usually taxable, so the after-tax hurdle is lower than the printed 4.52 percent, which makes borrowing at a given rate look slightly worse, not better.

Cash that would pay down a mortgage

If you carry a mortgage near the 7.32 percent average, each dollar of prepayment earns a guaranteed return equal to that rate, although an old mortgage at 3 percent offers nothing like it. The comparison then asks whether a solar loan's effective rate is above or below your own mortgage rate, since you are choosing which debt to carry. A solar loan at an effective 5.79 percent is cheaper debt than a 7.32 percent mortgage, so the dollars save more by retiring the mortgage balance than by avoiding the solar loan. A card balance at 22 percent beats both, and clearing it comes first.

Cash that is also your emergency reserve

This is where financing earns its place regardless of arithmetic. A system paid for in cash cannot be sold back for its price, and a household that drains its reserve to buy panels has swapped liquid money for an asset that pays back over a decade or more. Lenders do not require a reserve, so the decision rests with you. The break-even rate still applies; the only difference is that the safe-account alternative is worth more than its yield, and you should count the value of having it.

Loans with a fee behind them: the rate on the cash price

Now apply the method to the financing most often offered at the point of sale. The CFPB's August 2024 issue spotlight on solar financing reports stated APRs on solar-specific loans typically between 1 and 7 percent, with hidden fees typically 10 to 30 percent of the cash price and sometimes above 50 percent. The dealer-fee guide shows how to find the fee in your paperwork; here the question is only what it does to the rate.

The table fixes the cash price at $23,600 and the term at the stated length, adds a fee expressed as a share of the amount financed, and solves for the rate on the cash price. It assumes you keep the loan to the end of the term with no extra payments, and that assumption flatters every row, because any early payoff pushes the effective rate higher (the dealer-fee guide shows how much).

Read the last column against the benchmark table. A 1.99 percent loan with a 10 percent fee costs 2.93 percent on the cash price, below the one-year Treasury yield, so for a household holding safe cash it is the cheaper money. The same 1.99 percent headline with a 30 percent fee costs 5.34 percent, above that yield but below the 7.32 percent mortgage average. The 3.99 percent twenty-year loan with a 25 percent fee costs 7.53 percent, slightly above the mortgage average and well under a card or a personal loan.

The advertised APR tells you almost nothing about which of those you are holding. Between the first and last rows of the 2.99 percent group, the stated rate does not move at all while the rate on the cash price rises from 3.97 to 6.52 percent. This is why the cash quote in writing is the single most useful document in the whole purchase, and why the quote red flags guide treats a seller who will not state a cash price as a flag in itself.

The system's own return sets a ceiling on what to borrow at

A solar system is itself an investment with a rate of return, and borrowing at a rate above that return means the borrowed dollars cost more than they earn. Compute the return the same way as the loan's rate: find the rate at which the 25 years of bill savings, discounted, equal the price. This is an internal rate of return, and it gives you a ceiling. If the system returns 8.5 percent a year on a flat electricity price, a loan at 10 percent cannot pay for itself inside the window, whatever the monthly payment looks like.

The returns below use the inputs above with annual end-of-year cash flows. Because the loan rates elsewhere in this guide compound monthly, the two are close but not identical, so treat differences under a quarter of a point as ties.

The same $23,600 system with lower or higher savings moves the return as much as price does. At $1,800 of first-year savings the flat-price return falls to 5.3 percent; at $3,000 it rises to 11.5 percent. A household in a low-rate territory or with a heavily shaded roof sits near the first number, and one with high rates and a good roof near the second, which is why the loan decision cannot be separated from the production estimate. If you cannot yet say which it is, reading the production estimate comes before this page.

Set this table beside the effective-rate table. A $23,600 system returning 8.5 percent on a flat price can carry a loan at 5.79 percent, with a spread of about 2.7 points that a weaker roof or a lower bill would quickly use up. At $4.25 per watt the system returns 4.5 percent flat, and almost no fee-bearing loan in the previous table is cheaper than that, so financing it means paying more for the money than the system earns. The 3 percent rising-price column shows how much of this rests on one assumption: with rising rates the same loans look comfortable. Electricity prices are the part of the argument that belongs to your utility's tariff and to EnergyBS rate coverage, not to this site, and a decision that works only if rates climb is a decision to make with open eyes. The wider question of whether solar pays without the credit is worked in the break-even guide.

Payback and lifetime position on each path

Payback means different things for cash and loans, and the confusion is a favorite of sales presentations. With cash, simple payback is the price divided by yearly savings, which assumes the buyer also keeps the savings; when a landlord buys and a tenant pays the electric bill, the rental property guide replaces the savings with the rent premium that has to stand in for them. With a loan, there is usually no cash outlay up front, so a household can be cash-flow positive in month one and still pay far more in total. Two measures keep the comparison honest: the total paid divided by savings, which is the years of savings needed to cover everything you spend, and the net position after 25 years.

The fifth row is the one worth studying. It leaves the household ahead every month from the start by the widest margin in the table (the 6 percent fifteen-year loan clears the $200 by only 85 cents), which is exactly how it will be presented, and it also nets $11,819 over 25 years against $32,934 for cash. The difference of $21,115 is the interest and the fee, paid in installments small enough not to be noticed. A household can rationally choose that trade, for instance if it has no cash and the alternative is no system, but it should choose it knowing the number. The 10 percent twenty-year loan shows the other failure: its total paid takes 24.1 years of savings to recover, so it barely clears inside the 25-year window and leaves $1,874 at the end.

Payback also interacts with moving. A fee is paid up front inside the principal, so selling early means you carried it for only a few years of savings; the payback-if-you-move page works through what a buyer pays for panels and what is left to pay off at closing. For the general method behind simple payback and its limits, see how payback is calculated.

The month-19 payment jump and the other prepayment terms

The tables above assume level payments, and many solar loans do not behave that way: the CFPB's August 2024 spotlight describes loans that re-amortize to a higher payment at the 19th month unless a prepayment of about 30 percent of principal arrives, a structure the dealer-fee guide covers in full.

The effect is easy to compute. Take $23,600 at 2.99 percent over 25 years, and suppose the payment was sized on 70 percent of the principal, on the assumption that 30 percent ($7,080) would be paid down at month 18. The advertised payment is $78.25, against $111.79 for a plain 25-year loan at the same rate. If no prepayment arrives, the balance at month 18 is about $23,242, and re-amortizing it over the remaining 282 months gives $114.84 a month for the rest of the loan, which is $36.59 more than the payment the household budgeted around. If the $7,080 is paid, the balance drops to about $16,162 and the payment settles near $80.

This is an illustration of the mechanism the CFPB describes, not a copy of any lender's note. Terms differ by product and by date, and this page cannot tell you which current loans keep the structure now that the credit has ended. What you can do is ask for the answer in writing before signing: whether the payment changes at any date, what prepayment the schedule assumes, and what happens to the rate if the prepayment is missed. Compare the answer with the closed-end disclosure, where Regulation Z section 1026.18(g) requires the number, amounts and timing of payments to be stated. Our page on the credit's status covers what ended and when.

A prepayment also changes the cash-versus-loan arithmetic itself. A household that planned to pay $7,080 down at month 18 has used that much cash anyway, so the plan was never really a no-cash purchase; it was a three-quarters-cash purchase with a bridge loan. When you compare offers, count that lump sum as cash you put in, and size the comparison on the whole sequence of payments.

Borrowing against the house instead of the system

A home equity line or loan changes the comparison in three ways: the rate is a market rate you can see before you apply, the fee is a closing cost and not a markup on the cash price, and the house secures the debt. The EnergyBS piece on HELOC versus solar loan holds the rate comparison.

IRS Publication 936 for 2025 says home equity interest is deductible only when the money buys, builds or substantially improves the home that secures the loan, within a $750,000 limit ($375,000 if married filing separately), and only if you itemize. Whether a solar installation counts is a question for a tax preparer, so do not lower a loan's effective rate in your arithmetic until you know you will claim the interest.

Ask a solar lender in writing whether it will record a security interest against the property; the leased-system sale guide explains the termination step. If the installer fails after you have financed, the closed-installer guide covers who services the loan next, and the financing and ownership section places cash, loan, lease and PPA side by side. One more secured route is an assessment collected with the property tax; its rates, terms and the lien it creates are in the PACE guide, and paying a solar loan off inside a new mortgage is the subject of the refinance guide.

When paying cash means selling investments

Cash is not always a bank balance. When it comes from selling shares, it carries a tax cost that a loan avoids. Take a $40,000 taxable portfolio with a $20,000 cost basis held more than a year, a 15 percent federal long-term gains rate (IRS Topic 409, last reviewed September 24, 2026, says the rate on most net capital gain is no higher than 15 percent for most individuals for 2025), no state tax, and the same $23,600 system financed at 8 percent over ten years, a payment of $286.33. Raising $23,600 after tax means selling $25,514 and paying $1,914 of tax.

Compare two households. The first sells, pays cash and invests the $286.33 a month it would have owed the lender. The second borrows and keeps the portfolio. Both liquidate after ten years and pay 15 percent on gains. The table is our arithmetic and uses monthly nominal compounding: the stated annual return divided by 12.

The break-even return is about 7.84 percent a year, against 8.00 percent with no tax, because the borrower's unsold gains are taxed at the end anyway. Safe holdings earning near the 4.52 percent one-year Treasury yield lose to an 8 percent loan by thousands, so selling is the cheaper source of cash. Growth holdings can beat a loan under about 5 percent on the cash price, but only if they stay invested through bad years: the loan's cost is certain and the portfolio's return is not.