Although you won’t find it stated anywhere in your solar lease or ppa (power purchase agreement) contract or supporting documents, your 20 year ‘agreement’ has an implied interest rate and savvy consumers will ask the question,
“How does the interest rate on this solar lease compare to that of other financing options available to me?”
This question is of particular importance to those who may wish to take Federal Tax benefits associated with home improvement interest payment deductions.
While homeowners are eligible to ‘write off’ interest payments on home loans associated with home improvements against taxable income, this benefit is not available to interest associated with solar lease payments.
Thus, wouldn’t it be nice to know if you are leaving any money on the table by not taking advantage of these potential tax benefits?
Since the effective interest rates and money factors are curiously absent from the contract documents you’ll see, we’ve take the time to reverse engineer these rates and provide them at the various ‘escalator’ levels you may encounter in a solar lease.
An escalator is a compounding factor applied to your monthly lease payment or price per kilowatt hour (if you’re considering a power purchase agreement).
These escalators typically run from zero (0%) to 3.9% depending on the finance company and particular product you’re presented with.
Here’s the skinny on effective interest rates at the various common ‘escalator’ levels:
0% Escalator = 5.754%
0.9% Escalator = 6.212%
1.9% Escalator = 6.735%
2.5% Escalator = 7.056%
2.9% Escalator = 7.273%
3.9% Escalator = 7.824%
Armed with this knowledge, you now know how to compare leases and ppas against other financing options that may be available through other programs.
One final thing to watch out for:
Make sure you pay particular attention to the ‘residual value’ that may be called out at the end of the lease term.
Keep in mind that most solar leases/ppas, if you were to delve deep into the weeds of the legalese, make it clear that at the end of 20 years, should you buy the system, it’ll be the greater of the residual value or third party appraised value.
This residual value will increase the effective interest rates above from a quarter to a full point depending on the amount remaining or appraised.
To Understanding Real Costs!
P.S. – Our Next Secret Is A Huge Misunderstanding In The Solar Industry! We will be talking about the reason you simply can’t turn your AC to 50 and run it all the time once you go solar. If you do, you will get hit with a huge electric bill! We will talk about why in the next installment.
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