An installment savings account is a bit like agreeing to have a certain amount taken out of your paycheck for income taxes or to contribute to a 401(k) retirement plan. You agree to put a certain amount of money each month into that account. Unlike tax or retirement deductions, you can choose how much you set aside. It's like buying a refrigerator or a couch on an installment plan, except that with installment savings you will get that money back, with interest. Interest rates on installment savings usually are higher, even more than certificates of deposit.
A major disadvantage of an installment savings account is that you commit to put that much money into the account each month for a certain period of time. That reduces your flexibility with your monthly income. With ordinary savings, you can skip a month if things are tight. You can't do that with installment savings without paying a penalty or losing interest.
Your Money Is Tied Up
Another disadvantage of installment savings is that your money is tied up until the end of the agreed term. That can be one year or five. If you take out any money before the term ends, you'll pay a penalty. The amount of the penalty will vary with the specifics of your account, but often will be 90 to 180 days worth of interest.
Interest Is Locked
You are locked into a fixed interest rate with installment savings. You agree on an interest rate when you open the account with the bank or savings institution. If savings rates go up suddenly, you can't switch to take advantage of better rates. Your interest will typically be credited to your account monthly, but you can't get it until the end of the term.
Agree to an Amount
You usually have to start an installment savings account with a minimum of $1,000. You don't put that in all at once; this is how much you plan to put in total, in monthly increments until you reach $1,000. If you set up a $1,000 account for 48 months, for instance, you'll have to put in $20.83 a month for two years. You can agree to put in less every month, but will have to agree to leave the money longer.
There Are Advantages
An installment savings account can be good if you have trouble holding money aside to build up reserves. It can be better than a certificate of deposit, which has a fixed term like installment savings, because it doesn't require a big initial deposit and may pay more interest over an equal time period.
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