Improve Student Understanding of Amortized Loans

Amortized loans, such as mortgages and auto loans, are common real-world examples introduced in the first finance college course. Many students mistakenly believe that the monthly payments on an amortized loan should be larger than the monthly equivalent of the annual payments (the annual payment divided by 12) of the same loan. This paper mathematically demonstrates that the monthly payments must, in fact, be smaller than this monthly equivalent. Also, the paper shows a loanee does pay more interest with monthly payments. Furthermore, this paper presents an alternative approach to treat amortized loan payments as investment or an opportunity cost, thus improving student understanding of amortized loans and financial decision-making.

Authors

Publication Details

Journal
Applied Finance and Accounting
Published
2025-08-08
DOI
https://doi.org/10.11114/afa.v10i1.7877
Primary Topic
Innovations in Educational Methods
Type
article
Field-Weighted Citation Impact
0.00
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article

Improve Student Understanding of Amortized Loans

Percy Poon
Applied Finance and Accounting
Innovations in Educational Methods
article

Improve Student Understanding of Amortized Loans

Percy Poon
article en

Abstract

Amortized loans, such as mortgages and auto loans, are common real-world examples introduced in the first finance college course. Many students mistakenly believe that the monthly payments on an amortized loan should be larger than the monthly equivalent of the annual payments (the annual payment divided by 12) of the same loan. This paper mathematically demonstrates that the monthly payments must, in fact, be smaller than this monthly equivalent. Also, the paper shows a loanee does pay more interest with monthly payments. Furthermore, this paper presents an alternative approach to treat amortized loan payments as investment or an opportunity cost, thus improving student understanding of amortized loans and financial decision-making.

Applied Finance and AccountingVol. 10(1)
Peace, Justice and strong institutions
Openalex Percentile: Top 78%
Innovations in Educational Methods
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Improve Student Understanding of Amortized Loans — Percy Poon · Applied Finance and Accounting (2025) | TGRS Research Map | TGRS