I agree with minotaur and crimson.
regardless of drive configuration you need to backup your drives. whether internal or external, applications or music files. so you will always need an external drive.
my friend just purchased the same i3 21in imac you are considering and he is using the internal HD for his music storage. but he has a small music library and knows it it unlikely to expand past the 1TB space. he has external for backup of all data.
I have to add that there is potential for incompatibility with the iMac and certain USB DACs... with my i5 27in iMac I found incompatibility with my wavelength Brick DAC, as did Crimson.
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my thread]
Which external HDD to can be answered with "it depends"
Firewire or USB?
Personally I am a fan of using a different connection than the DAC, so firewire DAC would mean USB HDD and visa versa.
Noise tolerance?
Will you be in the same room as the HDD or other? I use an external OWC and it is fairly quiet but not silent by any means, spinning is audible when I am in the same room in front of the imac (since the imac is sooo quiet). But if you listen away from the computer (as I do in another room) for my main system any HDD sound