Amortization can sound intimidating, but teaching it in just one hour is absolutely possible—and incredibly valuable for students and adults alike. Here’s a step-by-step guide for educators, workshop leaders, and anyone looking to make the concept accessible, practical, and engaging.
Lesson Overview: Goals and Learning Outcomes
Objective:
By the end of the class, students should be able to:
-
Explain what amortization is
-
Understand how loan payments are split between principal and interest
-
Read a simple amortization schedule
-
Recognize why amortization matters for personal finance
Class Structure: One-Hour Amortization Lesson Plan
1. Warm-Up (5 minutes)
-
Ask: “If you borrow $10,000 for a car, do you pay the same amount toward the loan itself every month, or does it change over time?”
-
Goal: Get students thinking about how loans work.
2. What Is Amortization? (10 minutes)
-
Definition: Explain amortization as the process of paying off a loan over time through regular payments that cover both interest and principal.
-
Real-Life Analogy: Compare it to peeling layers off an onion—each payment removes a bit of the loan.
-
Visual: Show a basic amortization chart or pie chart (principal vs. interest for the first payment).
3. Breaking Down a Loan Payment (10 minutes)
-
Example:
-
Loan: $10,000
-
Interest Rate: 6%
-
Term: 5 years
-
-
Show: The first payment is mostly interest; over time, more goes to principal.
-
Interactive:
-
Use an online amortization calculator (projected on screen or via students’ phones/tablets).
-
Plug in numbers and view the first and last payment breakdowns.
-
-
Tip: Ask, “Why does the interest portion get smaller over time?”
4. Reading an Amortization Schedule (10 minutes)
-
Hand out: A simple one-page amortization schedule (or display on screen).
-
Walk through:
-
Payment number, due date, payment amount, interest paid, principal paid, remaining balance.
-
-
Activity:
-
Have students find when the principal portion becomes larger than the interest.
-
“What happens if you make an extra payment?”
-
5. Why Amortization Matters (10 minutes)
-
Discuss:
-
How extra payments reduce total interest.
-
The cost of only making minimum payments.
-
How understanding amortization can help you save money.
-
-
Relate: Tie in to mortgages, car loans, student loans.
6. Quick Quiz or Group Activity (10 minutes)
-
Quiz Ideas:
-
“If you make an extra $100 payment early in your loan, does it save you more or less interest than if you pay it later?”
-
“What part of your payment goes up over time, principal or interest?”
-
-
Or:
-
Small group challenge: Who can find the month when half the loan is paid off?
-
7. Wrap-Up & Key Takeaways (5 minutes)
-
Summarize:
-
Amortization helps you see how your payments reduce debt.
-
Knowing the breakdown can empower smarter financial decisions.
-
-
Provide: Links to free amortization calculators or downloadable schedules.