Some people refer to them as the solar industry’s dark secret. Others call them a blatant scam. And still others concede that millions of homeowners who have gone solar would never have been able do so to without them.
I’m talking about solar dealer fees, and you’ll need to know all about them if you’re thinking of financing the purchase of solar panels with a loan. In this article, we’ll take a closer look at dealer fees to help you better understand what they are and what role they might play in funding a solar installation for your home.
What are Solar Dealer Fees?
Broadly speaking, there are two ways of going solar. You either sign up for a lease or power purchase agreement with a solar company (third party owned or TPO) or you purchase the system outright. There are pros and cons to each of these options, which we go into in detail here:
If you do decide to purchase your solar system, there are two ways of going about that, too. You either pay cash for it or you finance the purchase by taking out a loan.
And finally, if you decide to take out a loan, there are several ways of going about that, as well. You either borrow from a bank, borrow from a friend or family member, or you can set up the financing through the solar company.
It is only for this last option that you’re likely to encounter dealer fees.
The first thing to know about dealer fees is that they’re probably misnamed. They should really be called lender fees or finance fees. That’s because, rather like points on a home mortgage, they’re imposed by the lending institution at the origination of the loan.
The solar company arranges the loan on behalf of the customer, the lender passes the dealer fee onto the installer. The installer, in turn, passes it on to the customer, on top of the cost of the solar installation.
And dealer fees can be substantial – typically between 15-25% of the project’s total cost. So a solar installation that would cost $40,000 can end up costing as much as $50,000 once solar dealer fees are included.
That’s enough to eat up most of your Federal Tax Credit, which is the principal reason people choose ownership over TPO in the first place.
Why Are Dealer Fees Necessary?
Whenever a lending institution writes a loan, they’re taking on a certain risk – the risk that the borrower won’t be able to pay it all back.
To understand why lenders impose dealer fees, it’s helpful to compare a solar loan with another expensive consumer product that many of us purchase with loans – our cars.
If someone borrows $20,000 to purchase a car over five years, there is always the possibility that two years into the loan, they’ll find themselves unable to keep making those payments.
In that eventuality, the lender always has, as a matter of last resort, the ability to repossess the vehicle. Repossession in this case serves two purposes.
First, it’s a huge incentive for the borrower to find some way, by hook or by crook, to keep making those payments, even as other bills may remain unpaid. Losing a car is a big disruption and could even worsen the borrower’s financial problems by making it impossible for them to get to work.
Secondly, repossession also helps the lender, in that it gives them a chance to recoup most, if not all the outstanding loan payments simply by selling the repossessed vehicle. Used cars have real value in our society and our free-market economy has plenty of established ways for a lender to ascertain and realize that value in the event of a default.
Now let’s take that same $20,000 loan and apply it instead to a solar system. If the borrower defaults on the loan in two years, sure, the lender can repossess the system, but it’s a lot more difficult than repossessing a car.
What’s more, neither the disruption to the borrower, nor the resale value of the system are going to be the same.
For the borrower, the repossession of solar panels is not going to deprive them of electricity in the same way that the repossession of a car would deprive them of transportation. The customer will still be connected to the grid and will just resort to getting their electricity from the utility company instead.
And the value of a used solar system is nowhere near as much as that of a used car, nor as easy to claw back simply by selling it at auction. For this reason and others, from a lender’s point of view, a solar loan is actually quite a high-risk proposition.
And what do lenders do when they’re asked to make high-risk loans? They make them more expensive. There are two ways to make a loan more expensive, either by charging a higher interest rate (APR) or imposing additional fees at origination.
By charging a dealer fee at the origination of the loan, the lender knows that they will at least get a substantial part of the loan repaid, even in the event of default. It also allows them to lend to people who might otherwise not qualify, either due to poor credit or high debt-to-income ratios, knowing that, even for such high-risk borrowers, they, the lender, will still be okay.
Who Benefits from Dealer Fees
And that brings us to the way that solar companies typically pitch their services.
For decades, solar was sold as a large investment that paid for itself over time. It was typically only available to homeowners who had the money to pay for it upfront. The value proposition was all about return on investment and how quickly the system would pay for itself (usually 7-10 years).
But what if you could convince a homeowner that, regardless of how long it took to pay for itself, a system that was cheaper month after month than the amount they were currently paying to the electric company, was an investment that would save them money now, as well as 7-10 years in the future?
Now the value proposition shifts from ROI to saving on your monthly power bill.
Throw in the added benefits of tax credits and SRECs and, hey presto, solar companies could open up whole new markets of less affluent homeowners who wouldn’t have previously believed they could afford to go solar.
The trouble is, in order to keep monthly payments lower than a typical power bill, they needed loans at super low APRs (0.99% to 2.99% over 20 or 25 years). The only way lenders could offer loans at such low rates, particularly high-risk ones like solar loans, is to load them up with up-front fees.
The Problem with Dealer Fees
While there are plenty of perfectly logical reasons why dealer fees are necessary for solar loans, and even a case to be made that they can be beneficial (to homeowners as well as to lenders and installers), many people still believe that they’re a scam.
This is largely due to the issue of transparency. Too many solar companies are less than forthcoming when it comes to explaining how dealer fees work and what they do. Some solar reps may not totally understand the fees themselves, and those that do are often fearful that they’ll lose the deal if they explain that as much as 25% could be added to the customer’s cost, just for the privilege of taking out the loan.
Admittedly, it’s not a very good selling point. Even if explained carefully, many homeowners will balk at such high fees just as a matter of principle. So far too many solar reps will just offer a price for loan-purchased system, without ever explaining just how much more it is than the corresponding price for cash.
How to Avoid Paying Dealer Fees
The simplest way to avoid paying dealers fees is to pay cash. And remember, from the solar company’s point of view, borrowing from a bank, a friend or a family member is the same as paying cash. You may have borrowed the money, but that’s between you and whoever lent it to you. For the solar company, it’s a cash deal.
If cash is not an option for you, some larger companies offer two types of loan options, one with a low APR that includes a dealer fee and another with higher APR but no dealer fees.
This is the way to go if you have any intention of paying off the loan early (assuming there are no prepayment penalties). Even the highest APR is going to disappear as soon as you pay off the loan.
A dealer fee, on the other hand, is rolled into the loan at origination, so, even if you win the lottery and pay your solar loan off the very next day, you’re still going to be on the hook for the full loan amount, which includes the dealer fee.
If you do intend to finance the purchase of a solar system for your home, it is important to realize that you are essentially buying two products. One of which is the solar system itself and the other of which is the loan.
When sourcing quotes from installers, be sure to ask them first for a quote based on the assumption that you’re going to pay cash and, only when you have that quote in hand, ask for a separate quote for a loan-purchased system.
You are also entitled to a copy of the Truth-in-Lending disclosure, which clearly explains details like the cash price of the solar system, what the APR rate is and how much the total amount of financing will cost you over the entire length of the loan.
At least with this breakdown, you will be able to compare the rates different companies will charge you to ensure you know what you are paying.