Finding the best finance product for your energy improvements depends on a number of factors, including your needs, the intended scope of work, and the point at which you are ready to conduct the transaction (new building purchase vs. existing building retrofit). This section is intended to shed light on the different categories of finance products so that you can have a better understanding of your options.
The local energy advisor can help navigate local financing options and pinpoint financing products that will meet your needs, as well as help you find rebates.
Unsecured Finance Products
Unsecured financing products are those for which the lender does not have a security interest in collateral assigned from the borrower. Considering that the primary risk in lending is not being repaid, unsecured loans are generally characterized by having higher interest rates in order to compensate the lender for the added risk of not having the security of collateral. Unsecured financing products typically are structured in one of two ways:
- Closed-end Product — Also known as an installment loan, is a financing product with a defined term, usually made available for a specific purpose (e.g., a five-year car loan).
- Revolving Term Credit Products — Revolving credit projects establish a maximum amount that can be borrowed, but allow borrowers to repay and draw down the amount as they wish, so long as the maximum is not exceeded (e.g., a credit card or a revolving credit facility offered through a contractor or vendor).
Table 1. Typical Attributes of Closed-End Unsecured Financing Products
|Point of sale, close quickly, integrate well into the contractor-based efficiency product and service delivery system||Loan terms are short compared to secured loans and have higher monthly costs that can make it hard to structure in a manner that energy savings exceed monthly payments|
|Can be customized to fit different borrowers’ credit profiles, depending on the capital sources that fund them (e.g. can tier interest rates according to FICO score)||Typical max loan sizes too low for large scale home retrofits; often <$15,000, limiting their ability to serve large-scale improvements|
|Due to streamlined loan origination process, origination costs are lower than secured loans||Rates typically higher than for secured loans to compensate investor for added risk|
Table 2. Typical Attributes of Revolving Term Credit Unsecured Financing Products
|There are no separate origination fees (the cost of origination is in the interest rate)||Interest rates are high, but due to the fact that this financing accepts lower credit scores, the rates are often even higher than other unsecured products|
|Terms are specified||Loan amounts are often as low as $3,000; too low for many comprehensive energy projects|
|Easy to use, highly flexible and fast||Credit card companies are becoming more selective about offering new credit card accounts and have often reduced maximum balances|
Secured Finance Products
Secured financing products are those for which the lender has security interest in collateral assigned from the borrower, typically in the property through the mortgage (a lien). This security interest is useful to lenders because it gives them a way to recover value if the borrower defaults and it is useful to the borrower because the added security to the lender usually leads to reduced interest rates as compared to unsecured products. The two most common secured products are:
- First Lien Products — A first lien places the lien holder first in line among all creditors except taxing authorities in the event of default, thereby providing the greatest level of security to the lender.
- Second Lien Products — A second lien places the lien holder lower among creditors, thus resulting in less security to the lender as compared to a first-lien product and consequently slightly higher interest rates to the borrower.
Table 3. Typical Attributes of Secured Financing Products
|Interest rates are lower than those for unsecured products||Origination fees are greater than those for unsecured products|
|Terms are longer than those for unsecured products||Can take a minimum of one to two weeks to originate (not point of sale)|
|More money can be borrowed on secured products than on unsecured products||Home equity-based products are of limited value for homeowners that have mortgage debt that exceeds the value of their home|
|Less risky than unsecured products because lenders have collateral interest in the property|