Installment accounts can help build savings
Growing your savings is hard these days.
Putting money into a bank isn't exactly a way to get rich, and it takes discipline to squirrel your cash away instead of spending it.
Fortunately for savers, some banks offer an interesting product that can help them realize their financial goals.
An installment savings account is an FDIC-insured account that requires you to enter a contract with a bank to make regular payments up to a preset maturity amount.
It's almost like paying a monthly bill, except instead of reducing your debt, you are growing your savings. Payments can be set up with an automatic monthly debit from your checking account.
Similar to a certificate of deposit, banks charge a withdrawal penalty if you want your money back early. Also, the bank can end your contract early if you miss too many payments.
If you open an account, you will receive regular bank statements and a 1099-INT at the end of the year, just as you do for other bank accounts.
An installment savings account is good for savers who lack the discipline to systematically pack away money. The risk of losing your attractive rate if you miss a payment gives you that extra incentive to be diligent.
And these fixed rates can indeed be attractive. They compare favorably to the best CD rates in our database.
For example, Pacific City Bank in Los Angeles is offering a 5-year installment savings account that pays 2.53% APY. If you set up auto-transfer from another Pacific City Bank account, that rate jumps up to 3.05% APY.
Another California bank, Wilshire State Bank, has a 3-year installment account, which it calls Rainbow Savings, that pays 2.53% APY. The rate is 2.79% if you agree to make your monthly transfers from another account at Wilshire.