Solar loans have been around for years, providing an affordable option to install solar panels. Yet, many homeowners are still unsure about how they work and how they can take advantage of this solar financing option. But don’t worry — we’re here to take a deeper look into solar loans and help people who are still on the fence. We’ll also see what is the difference between secured solar loans and unsecured solar loans and figure out which one you should consider.
What Are Secured Loans?
Simply put, secured loans are backed by your financial assets, also known as collateral. Usually, these assets are either your home or the solar energy system itself. The purpose of adding collateral to a loan is to reduce the risk for lenders. So, if you default on your loan, the company will seize the financial asset and sell it to pay off the debt.
Secured Solar Loans Pros
- Better interest rates: With secured loans, lenders are less likely to lose money. Naturally, borrowers also have more incentive to pay their monthly fees. As a result, this financing option has much lower interest rates, meaning that you’ll be paying less over the duration of the loan.
- Accessible eligibility requirements: Since collaterals always back up secured loans, lenders accept all sorts of applicants. In other words, the eligibility requirements are not as strict as for other loan types.
- Large loan amounts: More often than not, lenders will offer larger amounts on secured loans. That’s because they are confident that you’ll pay back the loan. And if you don’t, they’ll just seize your collateral, recouping their investment.
- Credit score improvement opportunities: A secured loan is a great way to improve your credit score. All you need to do is meet the repayment criteria! Thus, this type of loan is perfect for those with a poor credit history.
Secured Solar Loans Cons
- Risk of losing the collateral: If you default on a secured loan, the company has all the right to take your collateral away. That means you’ll need to pay close attention to your finances in order to make your repayments.
- Limited loan usage: Secured solar loans can only be used to purchase specific solar equipment. So, if you get a loan to afford solar panels, that will be the only thing you can use the money for.
- Credit score damage potential: Due to their low requirements, solar loans are easy to qualify for. Unfortunately, that means you might borrow more money than you can actually repay. And, apart from losing your collateral, defaulting on a secured solar loan will also negatively affect your credit history.
What Are Unsecured Solar Loans?
Unsecured loans don’t require the backing of a financial asset. Instead, they rely on your own credit history and the lender’s own judgment. Therefore, this type of solar loan is a high risk for lenders and is not as widespread as its secure counterpart.
Unsecured Solar Loans Pros
- Multi-purpose loan: You can spend the money you receive from an unsecured loan any way you want. As a result, they provide greater flexibility than other types of loans.
- Fast application and approval process: The application and approval process involves checking the borrower’s credit history. As such, it only takes a few days to get approved or denied.
- No risk of losing financial assets: These loans don’t require collateral, meaning that you don’t have to worry about losing a financial asset in case you default on your payments.
Unsecured Solar Loans Cons
- Strict eligibility requirements: Unsecured loans are not backed up by collateral. So, in order to accept an applicant, the lender will check their credit score, credit history, and income. Thus, you’ll need to have a strong financial position to even qualify.
- Hidden fees: Some lenders will add hidden expenses such as origination fees to compensate for the high risks of these loans.
- High-interest rates: The interest rates of unsecured loans tend to be very high. That’s because lenders want to cover the added risk and lack of collateral.
- Small loan amounts: Financial institutions offer much smaller amounts as they want to avoid losing considerable amounts of money in case of loan default.
Secured or Unsecured Loans — Which One to Choose?
When choosing a loan, you’ll need to consider your own needs and budget. On the one hand, secured loans are a great choice as they’ll provide a better long-term value. However, you’ll need to risk your own financial assets to back it up.
On the other hand, unsecured loans are more attractive if the interest tax deduction is not a concern for you. They are also a better choice if you want a quicker application and approval process.
So make sure to analyze the pros and cons of each solar loan before you actually sign any contract. And, if you need any more information about solar financing options, check out the knowledge center or get in touch with an Atlantic Key Energy professional!