INCONSISTENCY AND CORRECTION OF THE GERMAN AMORTIZATION SYSTEM

ABSTRACT The amortization systems, also called as amortization methods, are used to compute the installment value that a client must disburse (or spend) to pay off a loan or financing with the number of installments and the interest rate agreed for the loan or financing. This paper shows that the German Amortization System makes an inconsistent use of the interest paid in advance in its definition and generates an effective interest rate higher than the contracted, which makes this system abusive and unfair to the clients. In this article, two forms of correcting the German Amortization System are also proposed, making the effective interest rate equals to the contractual interest rate.