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Sunday 13th October 2024

Word of the Week – Liability

Welcome to Mouth Money’s Word of the Week, a weekly dive into essential personal financial phrases and words. We want to help simplify complex financial jargon and empower your understanding of money.

Word of the week Liability
Woman looking at an empty wallet

Liability

In personal finance, a liability refers to any financial obligation or debt that an individual owes to another party. It represents a claim against an individual’s assets or future income. Liabilities are typically classified into two main categories:

  1. Current Liabilities: These are short-term obligations that are expected to be settled within a year or the normal term of a financial product. Common examples of current liabilities in personal finance include credit card debt, utility bills, medical bills, and short-term loans.
  2. Long-Term Liabilities: These are obligations that extend beyond a year or the normal term of a financial product. Common examples include mortgages, car loans, student loans, and long-term personal loans.

Word of the week

Examples of liabilities

Credit card debt: Credit card balances are among the most common forms of liabilities. Since they often come with high interest rates and are due on a monthly basis, managing them effectively is crucial for avoiding financial strain.

Utility bills: These recurring payments, such as electricity, water, internet, or phone bills, represent short-term financial commitments that need to be settled regularly.

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Mortgages: A mortgage is one of the most common and significant long-term liabilities. Homebuyers borrow money to purchase a house, and the repayment period typically spans 15 to 30 years.

Car Loans: Auto loans are long-term liabilities used to finance the purchase of a vehicle, with terms generally ranging from 3 to 7 years.

Student Loans: These loans are used to finance higher education expenses and often have repayment terms of 10 to 25 years, depending on the type of loan and repayment plan.

Photo credits: Pexels

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