Are Solar Dealer Fees a Scam?

Some call them solar’s darkest secret, while others think of them as a scam. Yet there are countless homeowners who would never have been able to switch to solar without them. 

I am referring here to solar dealer fees – something you’ll need to be familiar with if you’re considering financing your purchase of solar panels through a loan.

In this piece, we are going deep on solar dealer fees so you can get a better grasp on what they mean and how they could potentially impact funding for your home’s solar installation.

What are Solar Dealer Fees?

In general terms, there are two routes your can take when going solar. You can either enter into a lease or power purchase agreement with a solar company (known as third-party ownership or TPO), or you can buy the system outright. 

Then if you opt to buy your solar system outright, there are also two ways you can go about doing that. Either pay upfront in cash, or finance it by securing a solar loan.

Finally, if you do decide to take out a loan, there are also several ways of doing that – borrowing from an established bank, seeking help from friends or family, or setting up financing directly through the solar company itself.

It is specifically when choosing this last option where dealer fees might come into play.

The first thing worth noting about solar dealer fees is they’re probably not aptly named – ‘lender fees’ or ‘finance charges’ would be more appropriate labels because they resemble origination fees or points that lenders impose on home mortgages.

The solar company works with a third-party financing partner to arrange the loan on behalf of the customer. The lender charges the installer an origination fee for setting up the loan (hence the term “dealer fee”). The installer, in turn, passes that fee on to the customer in the form of a higher cost of installation.

And beware! Solar dealer fees can be huge – usually around 20-30% of the project’s cost compared with the 2-3% you might expect to pay on a mortgage. 

So a solar installation that might cost $40k if you paid cash for it could end up costing over $50k once those solar dealer fees kick in! And the 30% Federal Investment Tax Credit that was your main reason for purchasing your system in the first place could end up going to the lender rather than into your pocket.

And you might never even know it (read on to find out why).

Why Do We Need Solar Dealer Fees?

Anytime a financial institution approves a loan, they’re assuming an inherent risk – the possibility that the borrower may fail to repay in full. To understand why lenders insist on imposing dealer fees, consider comparing solar loans with another high-cost consumer product often bought on credit – cars.

Car Loans Are a Safe Bet for Lenders

Imagine someone borrows $20k for a car purchase over five years; there’s always potential for default two years down the line if they can’t keep up with payments. As their final recourse, lenders have an option to repossess the vehicle, which serves two functions here.

Firstly, it strongly motivates borrowers to somehow continue paying off the loan despite other bills piling up. Losing their transportation could disrupt the borrower’s daily life and potentially worsen their financial problems if they depend on their car for work.

Secondly, repossession also provides the lender an opportunity to recover most, if not all of the outstanding loan by selling the car. That’s because used cars have real value in our society and there are plenty of established ways for lenders to recoup their loss by selling them at a fair market value.

But What About Solar Loans?

Now apply this same scenario using that same $20k to finance a solar system. In that case, if the borrower defaults after two years—yes—the lender could reclaim possession of the panels and inverter, but doing so is a lot ore difficult than taking back a car.

For the borrower, losing their panels would not be anywhere near as disruptive as  losing their car. They would just revert to getting their power from the utility company. And for the lender, second-hand solar systems don’t have anywhere near the value of a second-hand car. 

So lenders consider solar loans to be fairly high risk. And what do banks do when they make high risk loans? They make them more expensive, either by charging a higher interest rate or by imposing upfront costs.

By levying a hefty dealer fee at origination, the lender can be sure that, even in the event of a default, they’ll be able to recover most, if not all of the loan. 

That “safety net”  also allows the lender to make loans to candidates who might not otherwise qualify due to either poor credit score or high debt-to-income ratios.

How Solar Companies Benefit from Dealer Fees

This brings us to how solar companies traditionally market their offerings.

For many years, solar power was promoted as a substantial investment that eventually pays for itself. It was generally accessible only to homeowners who could afford upfront costs. The selling point revolved around return on investment (ROI) and the payback period (typically 7-10 years).

But imagine if you could persuade a homeowner that regardless of the payback time frame, owning a system which is cheaper month-by-month than their current electric bill would be an immediate money-saver in addition to the long-term benefits?

Suddenly, it’s no longer about ROI but about monthly energy cost savings.

Add into this mix the various tax incentives — suddenly less affluent homeowners are now potential customers; people who may have never thought they could afford to go solar.

The catch? To keep monthly payments below average electricity bills requires loans with extremely low APRs (ranging from 0.99% – 5.99% over 20 or 25 years). But lenders can only offer such low rates for high-risk loans like these by compensating with upfront fees.

The Problem with Dealer Fees

So there are several logical explanations as to why dealer fees play a critical role in the solar industry, and even an argument that they are good for homeowners, lenders, and installers alike. But many still view them as deceptive.

This skepticism primarily stems from lack of transparency. Too many solar companies fail to clearly disclose how these dealer fees operate or explain their purpose. 

Some solar reps might not fully understand these charges themselves, while others who do understand may fear that revealing up to 25% additional cost just for the privilege of taking out a loan might deter customers.

It’s not exactly a compelling selling point. Even when explained meticulously, many homeowners may resist such hefty charges out of principle alone. Too many reps tend to simply quote prices for systems bought with loans without ever fully explaining to the customer just how much more expensive it is compared with a cash purchase.

How to Avoid Solar Dealer Fees

The easiest way to avoid dealer fees is by making a cash payment. And remember that for solar companies, borrowing from any source like a bank, friend or family member equates to a cash deal. You might have borrowed the funds, but that’s an arrangement between you and your lender. From the perspective of the solar company, it’s treated as if it were paid in cash and, therefore, isn’t subject to dealer fees.

If cash isn’t feasible for you, some bigger firms present two kinds of loan alternatives – one carrying a low APR inclusive of dealer fee and another bearing higher APR without dealer fees. If there are no penalties for early repayment and you plan to pay off the loan ahead of time then this could be an ideal path.

Even the highest interest rate will disappear once the loan gets repaid, but a dealer fee is integrated into the initial loan amount loans which means even if you win the lottery the day after install and pay off your solar loan immediately, the repayment will still include those dealer fees.

Final Thoughts on Solar Dealer Fees

If you’re considering financing a home solar system, it’s crucial to understand that essentially you’re investing in two separate things. One is the solar system itself and the other is the loan.

When gathering quotes from different installers, always ask for an initial quote under the assumption that you’ll be paying cash. Only after securing this quote should you request another one for a system purchased with a solar loan.

And remember you have rights – including access to a Truth-in-Lending disclosure document. This will clearly outline key aspects of your loan such as the price of the system, what interest rate applies and the total amount you will pay over the life of the loan.

With these details laid out clearly, at least you’ll be able to compare quotes from different companies to ensure you know exactly what you are paying and for what.

The job of a good solar consultant is to help you to determine if a solar loan is the right way for you to go solar and just what impact dealer fees with have on you. If you’d like an informative, no-pressure chat with either of the Cape Cod Solar Guys, you can contact us here.

Massachusetts Solar Financing – Back to Home