This help center article provides an overview of loan modeling in Aurora’s financial simulations and instructions on how to model common loans on the market. Future system owners should consult a tax professional to ensure that they are eligible for the ITC and loan interest deductions as applicable.
Selecting and Modeling Loans
Setting up Loans
Loans are represented as Financing Products in Aurora. Aurora provides several default loans to choose from, and account admins can add additional Financing Products to quickly model all of their offered financial options.
- In your account, go to the Database tab
- Click on Financing Products
- Click Add Financing Product and specify a name
- Change the Project Type from Residential to Commercial if creating a commercial loan
- Click Add Loan
Loan Parameters
All loans in Aurora take the following parameters:
Principal: The percentage of the design’s system cost that is paid for by the loan.
Dealer Fee: The percentage of the financed cost that is taken by the financier. The loan principal will be increased so that after the dealer fee is removed, the installer receives the original system cost
Add Dealer Fee to System Cost: A checkbox to indicate whether the dealer fee is included in the system cost for calculating incentive values
Interest is Tax Deductible: A checkbox to indicate whether the interest can be deducted from the owner’s taxable income. This is not common for residential loans
Interest Rate: The annual interest rate as specified by the loan provider. Aurora converts this to a monthly interest rate for calculating payments
Duration: The loan term, in months. This indicates the number of months until the final payment
There are many varieties of loans in the solar industry. Some behave the same as a car loan with a constant monthly payment, others expect a paydown of the loan equal to the ITC (income tax credit), and others act as a “same-as-cash” bridge loan. The following sections cover how to pick a loan type to model.
Loan Types
Picking Loans
Solar loan products are sometimes difficult to classify between loan types. At Aurora we try to make all of them modelable, but as payment structures vary between financiers, there is no one-size-fits-all option. Here’s a list of which loan type to use for certain providers (if you don’t see your provider listed, contact our support team and we will add it)
For Dividend, Loanpal, Sunlight Financial or Mosaic: use the Solar-Style Loan
These companies expect the ITC portion of the loan to be paid down around month 18
During the first 18 months, interest is based on the entire loan principal
There is no payment due during the 1st month, but they do charge interest which must be paid off later.
If the prepayment is not completed, the monthly payment due increases to cover the ITC amount
For Sunnova: use a combination of a Mortgage-Style Loan and a Bullet Loan, or a Mortgage-Style Loan and a No-Payment Loan.
These companies expect the ITC portion of the loan to be paid down around month 18
During the first 18 months, interest is based only on the non-ITC portion of the loan principal
If the prepayment is not completed, the accrued interest on the ITC-portion of the loan is added to the loan principal and the monthly payments increase.
Solar-Style Loans (expected ITC prepayment)
Many solar loans on the market are set up so that the system owner pays a flat amount for the duration of their loan, and also make a one-time paydown sometime in the second year using their ITC savings from their federal tax return. These loans also have a grace period included to account for the time it takes for the owner to receive permission to operate from their utility provider. This is assumed to be 1 month in Aurora - if your loan has a different grace period, please let us know so we can discuss how to add that in the future.
To model these loans in Aurora, pick the Solar-Style Loan, and enter the loan duration, interest rate, and expected prepayment amount and month as stated by the loan provider. The loan principal will usually be 100% of the system cost.
Skipping the Prepayment
The owner is not required to make the early buydown if they choose to keep their federal tax credit for other purposes, but skipping the buydown will result in higher monthly payments until the completion of the loan. To model this, simply deselect the “Prepayment will be completed?” checkbox to model the effects.
Regular (Mortgage-Style) Loans
Mortgage-Style
Standard loans, also referred to as “mortgage-style” loans, feature a flat monthly payment for the life of the loan. These are common not only for home mortgages, but also car and student loan payments. Monthly payments first offset any accrued interest, followed by the loan’s principal.
PV system owners who finance their system with a mortgage-style loan can usually apply their Federal ITC tax credit to the loan principal as a one-type prepayment. Lenders that offer this type of loan usually accept a one-time prepayment with no added costs. The prepayment reduces the remaining principal on the loan, which reamortizes the loan and results in a lower payment for the remaining duration.
Pro Tip: the principal and interest payments for a Mortgage-Style Loan will return the same values as the IPMT and PPMT functions in Excel. You can easily replace excel workbooks with Aurora financial modeling.
HELOCs
Home Equity Line of Credit is a good option for homeowners, as they feature a lower interest rate than most unsecured loans. These are set up in the same way as a Mortgage-Style loan, but because solar is a home improvement investment, the homeowner may be able to deduct the interest paid on the loan from their tax liability. The homeowner should consult their CPA for advice on whether they can claim the interest as a tax deduction.
Same-As-Cash Loans for the ITC
The same-as-cash or Bullet Loan is an attractive option for PV owners, since they never have to pay out-of-pocket for the ITC-covered portion of their new system. With this loan, the owner receives a zero-interest, no-payment loan for anywhere from 14-18 months. They pay off the bullet loan when they receive their federal tax credit for the system. If the bullet loan is not paid off, it will typically convert to a normal pay-down loan.
Bullet loans can be set up in tandem with a standard loan to cover the whole cost of the system.To set this up, select the first loan as a Bullet Loan and enter the principal amount as the ITC value (26% in 2020), and then set up a second loan as the remaining principal amount.
Interest-Only and No-Payment Loans
Certain types of loans may feature starting periods where the owner only pays the interest, or makes no payments. After a certain point, these loans convert into a mortgage-style-loan during which the remaining principal is paid off. These can also be used in combination with the bullet loan or a mortgage-style loan to model varieties of loans not listed previously.
Interest-Only Loans
In an interest-only loan, the system owner will only pay off the accrued interest for the specified interest-only period. After the interest-only period ends, the loan converts to a mortgage-style loan and is paid down during the remaining time frame. A portion of the loan can also be paid down at any time during the loan.
No-Payment Loans
In a no-payment loan, the system owner makes no payments during the specified no-payment period. If the interest rate is non-zero, interest will accrue during this no-payment period. After the no-payment period ends, the loan converts to a mortgage-style loan and the owner pays down the original principal and any accrued interest during the remaining duration. A portion of the loan can also be paid down at any time during the loan.
In some solar-specific loans, the system cost is divided into an ITC portion and a non-ITC portion. The non-ITC portion is treated as a normal mortgage-style loan, and the ITC portion is treated as a bullet loan with no interest. If the customer does not complete a paydown, the ITC portion is treated as a no-payment loan