The residential solar loan industry has had it pretty good. Since the first solar loan products were introduced approximately six years ago, market interest rates have been at historic lows. This has enabled most solar finance companies to consistently provide extremely affordable interest rates on loans for homeowners seeking to go solar.
When the economy strengthens, the Federal Reserve raises interest rates to prevent inflation. Since the end of 2015 the Federal Reserve has made modest increases to the Fed Funds rate, a key benchmark. However, in the last 6 months alone, as concern about inflation has grown, the Fed raised rates multiple times and it now stands at 1.75%, the highest level since 2008. Two to four more increases are predicted for 2018.
What does this mean for Residential Solar?
The cumulative effect of these interest rate hikes means that the cost of borrowing has increased substantially. Although savers benefit as yields on savings accounts and CDs rise, it becomes more expensive for consumers to borrow. Already, rates on obligations like auto, credit card, personal loans, and mortgages have edged up.
Solar loans are not immune to these market forces and solar installers should expect price increases in 2018. Depending on how the financing is structured, solar installers may see higher loan interest rates, higher fees, or tighter underwriting criteria.
That said, these changes should not have a material impact on the residential solar value proposition. Put in perspective, an increase from 6.49% to 6.74% will only increase a customer’s payment on a 15-year loan by a few dollars a month.
What Can Solar Installers Do Now?
Although a normal part of the economic cycle, residential solar has been largely insulated from rising interest rates because solar loans have simply not been around that long. Although this new environment presents some concerns for solar installers, there are many actions that can be taken now to prepare and minimize the impact.
- Understand how your financing partners price their loans – No solar loan provider is immune from rising interest rates. Make sure that you understand your financing partners’ pricing model and how they are adjusting to the new reality. In some cases, rising interest rates may translate into higher fees, stricter underwriting criteria or changes in the availability of certain products.
- Update your pricing – Do your financing partners give you the ability to control your pricing? If so, now is a good time to work with them to make changes that allow you to serve your customers well and manage your business successfully in this new market reality.
- Invest in sales training – Although homeowners love low interest rates, the best solar sales reps sell on value. A quarter-point interest rate increase shouldn’t hurt your business, but not having a solid value proposition and stream of referrals certainly can. Make sure your sales reps have the training, tools, and support they need to succeed.
- Run a promotion – Now is a great time to run a promotion. You can create urgency by highlighting your customers’ opportunity to secure long-term fixed-rate financing today. It’s not clear how much longer the current rates will be available, and with even more rate hikes from the Federal Reserve expected this year, now is a great time to get into solar!
The value proposition for solar remains stronger than ever. Although rate increases should have a minimal impact on the cost of solar, solar installers should carefully consider how these changes will impact their business and adapt their pricing models to be successful in this new world.