Power of Interest

How to Teach Amortization in a One-Hour Financial Literacy Class

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.

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