The Three Ways to Pay for Solar, Ranked by 25-Year Return
When I was shopping for solar, every installer had an opinion on financing. The lease rep told me zero-down leases were the smart move for cash-flow reasons. The loan rep told me ownership was critical for tax credits. The cash-purchase installer told me to stop paying interest to banks. They all had skin in the game. So I ignored them and ran the numbers myself.
Here’s a 25-year comparison of all three options using my actual system as the baseline. My system: 10.2 kW, installed cost $28,400, located in central Ohio. Annual production estimate: 11,400 kWh. My current blended electricity rate: $0.13/kWh. I’m using a 2.5% annual electricity rate escalation, which is conservative based on the last decade of rate history in Ohio.
Option 1: Cash Purchase
How It Works
You pay the full cost upfront and own the system outright from day one. You claim the 30% federal Investment Tax Credit (ITC) in the year of installation, which in my case was $8,520 back in my pocket the following April.
My Numbers
- Gross system cost: $28,400
- Federal ITC (30%): -$8,520
- Net out-of-pocket: $19,880
- Year 1 electricity savings: ~$1,482 (11,400 kWh × $0.13)
- Simple payback (Year 1 savings only): ~13.4 years
But that 13.4-year payback ignores rate escalation. Using 2.5% annual rate increases, the savings grow each year. By Year 15, I’m saving about $2,100/year. By Year 25, closer to $2,700/year.
Total 25-year savings on cash purchase: approximately $49,800 in electricity costs avoided. Net of the $19,880 out-of-pocket, that’s a $29,920 net gain over 25 years. Internal rate of return: approximately 8.2%.
The Problem With Cash
Not everyone has $28,400 sitting in a savings account. And if you do, you need to consider opportunity cost — what would that money earn invested in index funds over 25 years? At a 7% average annual return, $19,880 grows to roughly $107,000. That’s the comparison that cash-purchase advocates often skip.
If you have the cash and can’t reliably get 7%+ returns elsewhere, cash is the best solar option. If you’re a decent investor, the math is closer than it looks.
Option 2: Solar Loan
How It Works
You borrow the money, own the system, and claim the 30% tax credit. The most common structure for solar loans is a 12–25 year term at fixed rates. Current solar loan rates (2024–2025) range from about 5.99% to 9.99%, depending on credit score and lender. I’ll use 7.99% for a 20-year loan for this comparison — realistic for solid credit.
My Numbers
- Loan amount: $28,400
- Rate: 7.99% over 20 years
- Monthly payment: ~$237
- Total payments over 20 years: $56,880
- Federal ITC refund in Year 1: $8,520 (applied to loan principal, reducing future interest)
- If ITC is applied to principal at Year 1: effective loan amount drops to ~$19,880, significantly reducing total interest paid
If you apply the $8,520 ITC refund directly to principal in Year 1 (which most financial advisors recommend), your 20-year total payments drop to roughly $47,200. Your net cost becomes about $38,680 when you account for the ITC.
Year 1 electricity savings: same $1,482, growing with rate escalation. Total 25-year savings: ~$49,800.
Net 25-year gain on solar loan: approximately $11,120 (savings minus net loan costs). IRR: approximately 3.4%.
The Loan Reality Check
Loans are the middle-ground option: you own the system, get the tax credit, and don’t need the cash. But interest eats into your return significantly. The key variables are your interest rate and whether you apply the ITC to principal immediately.
A 5.99% loan with ITC applied to principal is dramatically better than a 9.99% loan where you keep making payments for 20 years. Shop loan rates aggressively. EnergySage shows financing options alongside quotes. I wrote about why I ultimately chose to pay cash and whether that was right for me if you want the full reasoning, which makes comparing the total cost of different financing structures much easier.
Option 3: Solar Lease (or PPA)
How It Works
A solar company installs panels on your roof for free (or low cost). You agree to buy the electricity they produce at a fixed rate, or you pay a flat monthly lease payment. The company owns the system. They get the tax credit. You get locked-in electricity rates.
The Numbers That Sound Good
Lease reps lead with the pitch: “Your electricity rate is $0.13/kWh. We’ll sell you solar power at $0.09/kWh. You save 30% immediately with zero down.” That sounds compelling. And in Year 1, it’s real.
The Numbers That Don’t Sound As Good
Most leases have a 2–3% annual escalator on that $0.09/kWh rate. By Year 10, you’re paying $0.108/kWh for solar. By Year 20, you’re paying $0.133/kWh — potentially more than you’d pay the utility without solar.
Meanwhile, your utility rate also escalates. The gap closes. In good scenarios, you still save. In bad scenarios (if utility rates don’t escalate as fast as modeled), your “savings” are minimal or even negative.
My 25-Year Lease Projection
Using $0.09/kWh starting rate, 2.5% annual escalator on the lease, and $0.13/kWh utility rate with 2.5% annual escalation:
- Year 1 savings: ~$456 (approximately 11,400 kWh × $0.04 spread)
- By Year 12, the spread narrows to roughly $0.01–0.015/kWh
- Total 25-year savings vs. no solar: approximately $8,200
That’s real money. But compare it to the cash purchase net gain of $29,920 or even the loan net gain of $11,120. The lease leaves $3,000–$21,000 in value on the table over 25 years — and you don’t own anything at the end.
The Lease Pitfalls That Can Really Hurt You
- Home sale complications: If you sell your house, the lease transfers to the buyer — or you pay a transfer fee. Some buyers won’t accept a solar lease. This has killed real estate deals.
- No tax credit: The leasing company takes the 30% ITC, not you. On a $28,400 system, that’s $8,520 you’ll never see.
- No system ownership: After 20–25 years, you’ve paid and paid and own nothing. You can typically buy out the system at then-fair-market value, but that’s another check to write.
- Escalator risk: If your utility rate stays flat (possible if you’re in a heavily regulated market), the escalating lease payments could actually exceed what you’d have paid the utility.
The 25-Year Summary
| Option | Net 25-Year Gain | Upfront Required | Own the System? |
|---|---|---|---|
| Cash | ~$29,920 | $19,880 after ITC | Yes |
| Loan (7.99%, 20yr) | ~$11,120 | $0 | Yes |
| Lease | ~$8,200 | $0 | No |
What I Did — And What I’d Tell You
I paid cash. I had the money, my opportunity cost calculation was favorable, and I wanted the simplicity of owning a debt-free asset. My $19,880 net investment (after ITC) will generate roughly $29,920 in net savings over 25 years. That’s not a stock market return, but it’s a guaranteed, inflation-hedged return on an asset bolted to my house.
If I didn’t have the cash, I’d shop hard for a low-rate loan and apply every penny of the ITC refund directly to principal. I’d avoid leases unless my credit was poor or I had specific reasons to value the zero-maintenance aspect of not owning the system.
Use EnergySage to get multiple quotes and compare not just system prices but financing options side by side. The platform shows you cash, loan, and lease options from competing installers. Before diving into any of these numbers, it also helps to understand what solar salespeople don’t always disclose upfront. And once your system is running, tracking your actual ROI will tell you which financing choice paid off. That competitive pressure typically saves people $3,000–$5,000 compared to getting a single quote directly from an installer. It’s where I’d start if I were doing this again today.