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 feedback@depositaccounts.com 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.

Comments

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17 Comments.

Anonymous | May 24, 2009 | Comment #1

My question is: "How feasible is it to deal with Korean banks like Wilshire State Bank if you don't live in the vicinity of a branch?" In other words, if you have to deal with customer service by phone and you don't speak Korean, how easy is it to accomplish what you need to?

Anonymous | May 24, 2009 | Comment #2

you hire a translator

Anonymous | May 24, 2009 | Comment #3

You do NOT need to use the Wilshire State Bank checking as the "Pit-stop" account to make the monthly deposit for the Installment Savings Account. In fact, you can set up the auto-transfer directly from the Elink Savings, which currently has a 2.75% APY.

So maybe it is a good choice to put your all money in the Elink Savings, and then take advantage of the high APY of Installment Savings.

DataIsGold | May 24, 2009 | Comment #4

The thing with the eLink savings is there are actually two minimum deposit requirements.

One for the eLink deposit ($500).
One for the linked checking account: Regular ($500), Now Personal($2500), or Now Power Checking accounts($10000)

The Regular account has the lowest min @ $500 minimum balance requirement.

So I suppose if you don't mind $500 of your money earning no interest, you'll be fine.

Anonymous | May 24, 2009 | Comment #5

The previous poster seems to be unaware that WSB's Rainbow Savings account pays significantly higher rates if the money comes into the installment savings account via an automatic transfer from a WSB deposit account.

I simply set up a direct deposit of my monthly pension into a WSB simple checking account which has no minimum balance. The direct deposit comes in the first business day of the month, and I had WSB set up my automatic transfer from that account into my Rainbow Savings account on the 4th of each month.

I use the money in a rewards checking account at another bank for my ongoing cashflow needs, and replenish it whenever a CD matures.

Anonymous | May 24, 2009 | Comment #6

Look at you, Banking Guy, doing all this work on a Memorial Day Sunday!

Great spreadsheet.

Thank you.

When dealing with a Korean-American bank, what you need to do is call all the branches until you find an employee who speaks perfect English. I did this when it comes to Center Bank. I could not understand anything I was being told by my local branch. I found someone at a branch out of state that speaks so well.

Anonymous | May 25, 2009 | Comment #7

Hi,

I actually went into a branch and opened an account. The representative is Alex.... and he is a Mexican American. There were a couple of girls in the branch that appeared to be Korean but spoke perfect English. I called the FDIC to verrify the bank. I opened a 2.75 money market .... the rate is guaranteed until Janary2010. I am having an auto transfer once a month to fund each of the 4 different Rainbows I extablished. The total cannot be over 100,000. I think that this is an incredible rate given the times! FDIC ... no risk. So now I have been searching for more installment savings. I am going to go to Woori Bank on Tuesday. Does anybody have any more suggestions.

Anonymous | May 25, 2009 | Comment #8

In light of the no/low penalties for early withdrawal, the best strategy may be to max-out long term with a joint account. Wilshire St. is max 100K but other Korean banks have no maximum. The idea is to deposit as much money as you can at the highest rate. Also make sure that you can maintain those monthly deposits. Even when using auto-transfer, you'll need to ACH into that checking account or mail a check.

Anonymous | May 25, 2009 | Comment #9

To Anonymous at 11:34 PM May 24: Which branch of Wilshire State did you go to?

Anonymous | May 25, 2009 | Comment #10

It is a big hustle for lousy 0.4% extra then what I'm making now.
It is not for everyone to do all of those setting and transfers and ACH and then if you can not fulfill any of these things, you may wind up worse off then a regular CD or high interest checking account.

Thanks for the explanation and the table.

Anonymous | May 25, 2009 | Comment #11

I too have the automatic deposits being taken from my eLink Savings account at WSB, and I also have ACH links set up between eLink Savings and my accounts at other banks, using the ACH services of those other banks to push deposits into my eLink Savings. By the way, I have had no problems in communicating with CSRs at Wilshire State Bank, or with those at Woori America Bank. To me, the installment savings accounts are an attractive option precisely because you don't need to deplete a large sum from more liquid accounts at once, thus leaving an "emergency fund" more or less intact, while gradually building up savings in the installment account at a more favorable rate.

Political news | May 25, 2009 | Comment #12

have installment accounts at wilshire in flushing and woori in woodside. savings account at wilshire checking at woori. woori does not compound at same pace as wilshire yields a drop below on 3 yr

mk | May 26, 2009 | Comment #13

Banking Guy,

You may be able to increase your yield with multiple installment accounts withe different terms.

For example, the 10,000 you currently have can be divided into multiple installment account payments. 12 month, 18 months, 24 months, 30 months and 36 months. Exhaust the money over the next 12 months. Choose target amount in each plan wisely (can be calculated to optimize). Then when the first plan matures after 12 months use that money to pay installments. When teh 18 month plan matures, use that money to pay the installments on the other 3 plans and so on.

Am I making sense?

Banking Guy | May 26, 2009 | Comment #14

MK, That's a good idea. I was also thinking of regular CDs instead of the savings, but since higher returns are possible with the installment plan, that should maximize the return even more. It will take quite a bit more of spreadsheet work.

krk77 | May 27, 2009 | Comment #15

Banking Guy,
some folks at fatwallet have done some calculations see:
http://www.fatwallet.com/forums/finance/916671/?start=100

also not sure if you noticed Wilshire has Money Market account with 2.8% APY

Anonymous | Jun 2, 2009 | Comment #16

Even if the bank is FDIC insured, how can we verify that this particular product - installment savings - is a product insured by FDIC?

As I understand, FDIC insured banks can sell products NOT insured by FDIC.

Are we taking the bank's word for it? Or is there a better way to verify, since this product is different from the "savings" or "money market" or "checking" or "CDs" as defined in FDIC's web page?

Anonymous | Oct 24, 2011 | Comment #17

Ken,

What formula did you use to get the effective apy? I set up my ISA spreadsheet just like yours but don't know the calculation. Could you please help me out?

Thanks!

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