So...you're in the market for a solar installation.
You've seen a TON of targeted ads telling you that the government will pay for your install and...and...and...
But the most compelling ad you might have seen tells you that you can spend LESS on solar than you do for your current electric bill!
Too good to be true?
Well, that depends...
I guess I'd ask you if you care about how and where your money gets spent.
The truth is, these loans are real. But please bear in mind that it is a long term loan and how they get you down to an interest rate that is barely above zero deserves a lot of your attention.
Full disclosure: DPI Solar has offered these loans in the past, but we partnered with a very reputable lender and we always disclosed how the loan worked. After several years (and no takers on these loans due to our transparency) we no longer support or offer these loans as they feel (to me) predatory and misleading.
So...ready for a little dose of reality? Good! Cuz here we go:
The "lower payment than your electric bill" loan works like this:
First - you have the price your installer is going to charge you: this is the "cash price" of your project.
Next, you have your "lower payment than your electric bill" loan. This loan has (historically) been a very low interest rate (0.99% - 1.49%). The loan term of this loan is long (25 years).
You're probably thinking that the loan term is how we get so low, but the question you should ask yourself is: How/why would a lender "settle" for so little interest over the course of 25 years (when a basic savings account would possibly generate more income over the same amount of time for the lender)?
The answer? They AREN'T settling at all. In fact, they are making more money off of your loan than a much higher interest rate loan (5% over 15 years).
You're not buying this, are you? Because Josh says "math wins MOST arguments, right? And the math doesn't work here!
Well, what nobody has told you (that is trying to get you to buy into this loan) is that the installer (DPI Solar or otherwise) gets charged a "dealer fee" from the lender. This fee is justified (by the lender) as a fee to use/offer their loans. But if you were to call the lender and ask them what their fees are or if there is an origination fee on their end, they will slyly tell you "No! We don't have fees on our loans!" - which is a partial truth. You see, they deduct their fee from the total payment to the installer once the project wraps up. So in essence, they don't charge the fee to you - the installer is adding it in - and the lender is deducting their fee from the amount paid to the solar installer.
So, how much are these fees?
Take a look below and you'll see how much they can be for various loans at different loan lengths (I've omitted the lender name, but these are the fees we were charged for these loans). Also, I'm going to list the cash price of this project at $30,000 (so you can compare it the final loan price)
Total Loan Amount
Cash Price: $30,000 Dealer Fee: (ie: "day two payoff amount")
S...T 5-Year Loan @ 0.99% Interest Rate: 17.99% ($6,580) $36,580
S...T 10-Year Loan @ 0.99% Interest Rate: 20.99% ($7,969) $37,969
S...T 15-Year Loan @ 0.99% Interest Rate: 23.99% ($9,468) $39,468
S...T 20-Year Loan @ 0.99% Interest Rate: 27.99% ($11,660) $41,660
S...T 25-Year Loan @ 0.99% Interest Rate: 30.99% ($13,471) $43,471
Now, before we go any further (and it should scare you that the "day two" payoff of your 25 year loan is $13,471 HIGHER than the "cash price" of your project) I need to explain something that I learned the "hard way":
How banks calculate their amounts on loans when a dealer fee is attached to it. Well, if you have your calculator out (and we use the 25 year loan listed above), you will be inclined to perform the following math:
Cash price ($30,000) x (30.99%) = Dealer Fee (in $). In this scenario, you'd estimate the "dealer fee" to be: $9,297 - yet the amount shown above is way higher ($13,471), but why?
Well folks, when I used one of these loans for the first time, I learned (the hard way) that banks don't calculate their fees the same way I did (which is the above method). So how does their math work?
It's like this:
You have a fee of 30.99%
You subtract 30.99% from 100% - and you get a new number: 69.01%
The lender then takes your "cash price" and divides it by: 69.01%
So the formula to calculate this fee is: $30,000 / 0.6901 = $43,417 - which translates into a dealer fee of $13,471.
So, how did I "learn the hard way" about this calculation? Well, yours truly made the mistake of using the wrong method to calculate the "total loan amount" for a project that a customer wanted to use this loan for. So, did the lender take a lower fee out of the total loan amount because I messed up? Nope. They just paid us less than our cash price quoted for the project and took their full dealer fee out of the loan to pay themselves.
Hopefully, that little example of how I messed up should somewhat clarify how these loans work: The lender pays the installer the "cash price" of the loan (when they distribute the money) and they keep the "dealer fee" for themselves.
So, where are we now? We have a low interest rate, a low payment, and a huge dealer fee. What's the drawback?
Well, in my opinion, the drawback is the "day two" payoff value of the loan. What do I mean by "day two" payoff value? Well, I see loans in two ways:
1) the amount you finance
2) the amount you will owe to pay it off (early)
The day after you sign the paperwork (ie: day two) - you will need to come up with the total amount of the loan to pay it off (less as time goes by and you pay down the principle). If you used one of these clever loans, then your payoff includes the "dealer fee".
So, on a $30,000 project, your day-two payoff on a 25 year loan with 0.99% APR would be $43,471.
What are your options (and what does DPI Solar bring to the table in lieu of these very popular, though misunderstood loans)?
Well, if your project's cash price is $30,000 and you want to finance this amount of money, we will point you towards Puget Sound Cooperative Credit Union (aka PSCCU). They have a solar loan with a meager $220 fee to originate the loan. If you're doing the math, that means you can get financing for this same project for a total loan value of $30,220 (instead of $43,471).
The nuances of each of these loans are different, but what I like to show our customers is the total cost to them after they take the loan to full term and pay it off.
PSCCU's loans are up to 15 years and carry a 5% interest rate. The total cost of that loan after 15 years (for a $30k project) is $39,930
S...T's 25-Year Loan @ 0.99% Interest Rate will have a total cost to you (after you've paid it off in year 25) of $47,158
PSCCU's "day two" payoff: $30,220
S...T 25-Year Loan @ 0.99% Interest Rate "day two" payoff: $43,471
Remember - Oregon does not allow any lender to charge unpaid interest on loans paid off before their end-date (ie: there are no "pre-payment" penalties on any loans originated in Oregon - they're not allowed). So the "day two" payoff really does matter to our customers.
Finally - the tempting "lower than electric bill" payment - how are they calculating the payment for the "S...T 25-Year Loan @ 0.99% Interest Rate" loan?
This loan breaks down into TWO actual loans:
1) 70% of loan value is used to calculate the low monthly payment payment at the term (25 years) and interest rate (0.99%)
2) 30% "Tax Credit Loan" which is 30% of the total loan value and is a secondary loan (usually a 0% interest for "one tax season")
If the 30% seems a bit convenient, you're not wrong: it's equal to your tax credit (that most customers get back in the form of a "tax refund"). The catch here is that this type of loan requires you to repay the 30% loan with this refund. If you fail to repay it, the consequences can be severe (including penalties for unpaid interest, a higher interest rate associated with the 30% loan that kicks in under non-payment, and blending your low interest loan with the second loan). If you do end up failing to repay the 30% Tax Credit Loan, the lender will roll that loan into the main loan (and blend the two interest rates). The result of non-payment is a substantially higher loan amount with a much higher monthly payment.
PSCCU's loan does not require you to apply your tax refund to their loan...but...
If you do choose to apply your refund to their loan, then they will re-amortize your loan to reflect a "balloon payment" made on the loans' principle. Doing this will result in a lower monthly payment for the remainder of the loan term. You could look at their loan as similar in function to the "S...T 25-Year Loan @ 0.99% Interest" loan, with the noted exception that PSCCU seemingly operates their loan in reverse: you start out with a higher monthly payment and have the OPTION to lower your payment by applying your tax refund to the loan in the first 18 months.
We like companies like PSCCU for the fact that they are choosing to approach our industry with the same values and designs that they would for any other loan they offer. There's nothing super special about their loan - they make money on the interest yet they will originate the loan for a very low fee.
DPI Solar stopped representing the other types of loans because once we figured out what was "behind the curtain", we realized we'd never use these loans ourselves, so why would we ask our customers to use it? They end up costing you more money, they have awful penalties for non-payment of the "tax credit loan" and in the end, they are 10 years longer than other options on the market.
Math wins most arguments, right?
Unless you just have to have that super low interest rate (which, by now I hope you don't feel that way, because you're paying up front - significantly - for that "bragging rights" low interest rate), we think you will be better served to listen to a few other options you have that will save you a ton of money and make the "day two" payoff literally thousands of dollars less! That way, should you sell your home before the loan term ends, part of your profit will go to pay off the solar loan. Wouldn't you rather have a much smaller payoff when that day comes? Hence the term "day two" payoff :)
Thanks for reading. We hope this helps pull back the curtain on some of these loans.
Call us at (503) 857-0099 if you have more questions!