How to Maximize the Return of an Installment Savings Account

POSTED ON SATURDAY, MAY 30, 2009 BY Ken Tumin

In the last several months I've posted on several installment savings accounts. There are not a lot of banks offering these. They appear most common among banks that cater to the Korean-American communities. Many of these offer rates much higher than the best CD rates. Examples of rates from Wilshire State Bank (which is available nationwide) as of 5/24/09 include:

5.12% APY 36 months
4.86% APY 30 months
4.86% APY 24 months
4.60% APY 18 months
4.60% APY 12 months

These rates are a little deceptive due to how installment savings account work. With installment accounts, you don't make a lump sum initial deposit. Instead you make equal monthly deposits during the term. So for the first month, you only earn interest on your first monthly installment. The second month you earn interest on the first and second month installment, and this continues through the entire term of the installment savings account. So if you have a contract amount of $10,000 and a 12-month term, you'll make 12 deposits of $813.30. As you can see, the high interest rate doesn't help much early in the term since there's not much of a balance.

As in the case of the Wilshire State Bank installment savings account (Rainbow Savings), you receive the best rate if you set up automatic transfers from a Wilshire State Bank checking account into the installment savings account. If you deposit a lump sum into the checking account, you'll lose out on interest while the money sits in the checking account earning little if any interest. To maximize the amount of interest that you earn, you'll want to set up automatic transfers from an online bank (like at Ally/GMAC Bank) into the checking account.

Update 5/25/09: Several readers have noted that Wilshire State Bank's eLink Savings Account can be used for the automatic deposits, and this savings account continues to pay a very competitive rate of 2.75% APY as of 5/25/09. I have more details on this Savings Account in my Wilshire State Bank review.

I've set up an example of how to calculate a return assuming that you have a lump sum. The spreadsheet combines the interest of the installment savings account and a regular savings account. I've used Google spreadsheets, and I've embedded the spreadsheet below:

These numbers are based on what Wilshire State Bank lists for a 12-month Rainbow Savings Account as of 5/24/09.

The spreadsheet has the following assumptions:

Installment savings account interest rate = 4.50%
Regular savings account interest rate = 2.00% (and remains the same for the year)
Initial balance = $9,759.60
12 monthly deposits of $813.30 into the installment savings account
The initial balance minus the first installment is deposited into the regular savings account
Interest is compounded monthly
No interest is lost during the transfers of the money into the installment account

One thing that the spreadsheet does not take into account is the lost interest during the transfer of the money from the online savings account, to the checking account and finally into the installment savings account. You'll probably lose around one week of interest for the installment amount each month. I estimate that this will lower the effective return by about 4 basis points. You'll lose more if a minimum balance is required in the checking account to avoid fees.

At the bottom of the spreadsheet, I calculate what I call the effective APY which is based on the total return of both the installment savings account and the regular savings account. In this example, the effective APY is 3.40%. So a combination of the installment savings account and an online savings account can allow you to do much better than a comparable CD.

Refer to my installlment savings account page for other banks offering these. For more details about Wilshire State Bank's Rainbow Account, please refer to my Wilshire State Bank review.

For the latest top CD rates, refer to my weekly rate summary.

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact [email protected] to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.

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