How a personal loan for solar panel loans work
A personal loan is money you borrow from a lender and repay with interest, typically in monthly installments. There are two types of personal loans -- unsecured and secured. An unsecured personal loan means you don't have to put up collateral for the loan. A secured loan requires you to put something of value up as collateral.
Pros and cons of personal loans
If you're considering a personal loan to purchase solar panels, it's wise to weigh the pros and cons.
Pros
- You may be able to borrow the entire amount required to install solar panels.
- Since personal loans may be secured or unsecured, you can choose which type of loan works best.
Cons
- You must pay interest on the loan, and if your credit score is low, your interest rate may be high.
- You'll need to work a new monthly payment into your budget.
- If you decide to take out a secured loan to qualify for a lower interest rate, you risk having the asset used as collateral repossessed if you miss payments.
Take the time to decide whether it's the right move to take out a personal loan to cover the cost of solar panels, based on these points.
Getting a low-interest solar panel loan
As with all loans, the goal is to land the lowest possible interest rate. Here are some of the factors that go into deciding your rate.
Your credit score
The higher your credit score, the better your chances of landing a low interest rate. If your credit score is on the low side, consider taking steps to boost it before applying for a loan, such as paying down debt and checking your credit reports for errors.
Employment and income
Lenders routinely ask for proof of employment status and how much money you earn. When checking your income, they want assurance that you can afford monthly payments.
Secured or unsecured
Taking out a secured loan means putting something of value up as collateral. However, it also means you risk losing the collateral if you miss payments. Still, because lenders know there's a valuable asset on the line (meaning less risk to them), you're likely to be offered a lower interest rate.
Your repayment timeline
Lenders consider longer-term loans riskier because there's more time for things to go wrong. They offset the additional risk by charging a higher interest rate.
The workaround is to choose the shortest loan term you can afford to repay. Not only will you be rid of the loan sooner, but you'll likely pay a lower rate and less interest overall.
How to apply for a solar panel loan
Here's how to apply for a personal loan.
1. Check your credit score
High credit scores are rewarded with lower interest rates and loan fees. Before proceeding, check your credit score and order a copy of your credit report. If it's low, take steps to raise it.
2. Decide how much you want to borrow
Work with your contractor to learn how much money you'll need upfront to pay for your new solar panels.
3. Rate shop
Check several lenders, remembering that interest rates only tell part of the story. Also, look at the APR, which includes interest, fees, and other charges. If a potential lender conducts a hard credit inquiry during the prequalification process, your credit score may drop by a few points. However, making regular, on-time payments will help your score to rebound.
5. Decide on a lender
Complete a full loan application after you've shopped lenders and know which offers the lowest APR and best repayment terms. Once approved, read over the loan agreement and ask questions of the lender if there's anything you don't understand. Sign the loan agreement, await loan proceeds, and get ready to make your first payment approximately one month later.
