How Does PayPal Work?

How Does PayPal Work?
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Created back in 1998, PayPal has become known as a worldwide online payment service that's used for online shopping, paying bills, receiving money for items and work performed and sending gifts to friends and family. PayPal's popularity stems from how it works with many payment methods and how it offers a secure way to handle transactions without sharing your banking and credit card information directly with others. But before you can take advantage of this helpful service, you need to know how to get an account set up, compare the pros and cons and learn all about the ways to send, receive and use your money.

So, How Does PayPal Work?

Although PayPal offers many options when it comes to ways to fund the account, conduct transactions and cash out money, the main premise is quite simple. You create an account, link payment sources, like bank accounts and credit cards, and then you can send, receive and transfer funds without the other party getting your financial details.

For example, if you work online, your client may use PayPal to pay you for your work, or your roommate might use their linked bank account to send you part of your rent for the month through PayPal. On the other hand, you might use a linked credit card on PayPal to pay for an item you won through an eBay auction.

With PayPal, rather than having the money that's received go directly to your bank account, it normally goes to your account balance. Unless you opt out, this money is held in the account so that it's available for use. For example, you can use the PayPal app or a PayPal debit card to withdraw cash similar to how you would with a checking or savings account. You can use this money to make purchases or send transfers online to others without incurring a fee, or you can have the balance sent to your debit card or bank account or even get a check mailed to your home for the amount.

When your PayPal account doesn't have enough cash in the balance for a transaction, what happens depends on the transaction type. For example, a PayPal Cash Card transaction at a checkout lane or ATM would get declined since it only uses your cash balance. On the other hand, you'd be able to use a linked payment source like a credit card or bank account for online shopping and transfers to others on PayPal's website and app.

Understanding PayPal Benefits and Disadvantages

To decide whether to get started with PayPal, it helps to know what benefits the service offers as well as the drawbacks that may apply depending on how you use your account.

The main benefits of PayPal include how easy, flexible and secure the service is for users. Handling most transactions is usually as easy as a few clicks or taps on the PayPal website or mobile app. This makes it easy to shop, send funds to family, move money around and even get paid for your job.

You also get many options to use the funds you receive, whether you choose to withdraw them at an ATM, spend them online or transfer them to a bank account. The security benefits, such as having your confidential financial data hidden and getting purchase protection to prevent fraud, make the payment provider appealing as well.

On the other hand, the service does have disadvantages, like PayPal fees, the time needed for bank transfers and some limitations for use that you need to consider. For example, if you need to send money internationally or with a debit or credit card, you face transaction fees based on a percentage of the amount and whatever currency you choose. Transfers to and from bank accounts can take several days and be less convenient if you need to make them often. Further, access to your account or funds can be limited due to the site's policies on reserves and security, so you may have to wait before you can spend the money received from certain sources.

Getting a PayPal Account

To take advantage of PayPal, you need to go through the signup and verification processes. You can find a "Sign Up" button on the PayPal homepage that asks whether you want a personal or business account. Unless you're a business who needs to give employees account access or send invoices regularly, the personal account suits the needs of most users.

To create your personal account, you go through these steps:

  1. Provide your mobile number and receive a confirmation code.
  2. Enter your mobile confirmation code.
  3. Provide your name, email address and desired password.
  4. Give your full address and agree to the site's terms.
  5. Click the link in your email confirmation.
  6. Add an initial funding source (such as a bank account or card) through the "Wallet" option on the PayPal website. You can also apply for PayPal credit.
  7. Get your account verified either by getting a PayPal credit card or successfully adding your bank account and reporting two small deposit amounts made.

Once your account is set up, you can start sending and receiving money but to get the most use of the platform, you need to perform some further actions to choose the type of balance account you want. PayPal Cash is the default option you see when you receive money for the first time, and this allows you to keep a balance for transactions but not get some extra perks that Plus accounts do. You can upgrade to the PayPal Cash Plus option if you want to have additional deposit and withdrawal options. This requires either requesting a PayPal debit card, arranging for savings goals or using direct deposit.

Funding Your PayPal Account Balance

If you just want to send money to people with a credit card and transfer money received to a bank account immediately, you can do so as soon as you link those payment sources to your account. However, you can add to the PayPal balance in your account so that you have a cash balance to pay for an online purchase, send funds to a friend, withdraw as needed or move to a bank account.

You have many of the following options to consider:

  • Request money from another user​: You can provide your PayPal mobile number, email address or username to someone and have them send you money directly. Or you can locate the "Send & Request" or "Request" option on the PayPal website or app, enter the payer's PayPal information, specify the amount needed, add a note and initiate the request. Whenever the money arrives, you receive a notification from PayPal and see the money added to your account balance.
  • Get paid through an agreement​: Whether you do freelance work online or sell items through an e-commerce site, you may be asked to set PayPal as the default method. This means you could get the money automatically sent to PayPal on the interval agreed upon, or the payer may have you click a button to send funds to PayPal. The payer may or may not choose to pay related transaction fees, so it's worth checking if you choose this option.
  • Transfer from linked bank account​: When viewing your PayPal balance on the website or app, there's an option to add money from your bank account. Once you specify the bank account and amount, it should be available in your PayPal balance within ​five business days​, and no fees are needed.
  • Deposit money at a retail location​: As long as you have a PayPal Cash Plus account, you can locate the "Add Cash at a Store" option in the PayPal app, specify a local retailer such as Walmart or CVS and then add ​up to $1,500​ a day (​$20 to $500​ per transaction, ​$5,000​ per month) for a small fee that varies by retailer. Once you fill in the details, you get a special code to show a cashier.
  • Cash check online​: PayPal Cash Plus accounts also feature a check-cashing option in the PayPal app where you can take pictures of a check, fill out a short form and then see the money put into your PayPal account once it's approved.
  • Use direct deposit​: You can also locate a direct deposit setup option if you're a PayPal Cash Plus member so that you can have your paychecks put in your account regularly. PayPal provides you with a routing number and account number to give your employer, and you don't have to pay fees for direct deposits.

Using Money Through PayPal

When it comes to transferring or withdrawing money and making purchases through PayPal, here are some of your many options to consider:

  • Transfer money out​: If you want to move your PayPal cash out so you can use it anywhere you wish, you can look for the "Transfer Money" button near your PayPal balance and get a few options. First, you can transfer it directly to your linked bank account either through a regular two- to three-day transfer or immediately to your linked debit card. The debit card option costs ​1 percent​ of the transfer amount (​$10​ maximum fee). Second, you could just pay a ​$1.50​ fee and get a paper check mailed ​within 10 days​.
  • Sending money to another PayPal account​: Whether you need to send money to a friend, family member or company, you can do so through the PayPal website. Using the "Send & Request" or "Send" option, type either the mobile number, username or email address of the recipient, specify the amount and any note to the person, and then proceed once you agree to any fees required. As long as you're sending money from your bank account or PayPal balance to another U.S. user, you don't need to worry about a fee. But other payment sources, such as credit and debit cards, will lead to a funding fee that's equal to a fixed amount based on the currency plus ​2.9 percent​ of the transfer amount in most cases. However, international transfers incur a ​5 percent​ fee for bank account and PayPal balance transactions, while other payment sources incur this ​5 percent​ fee plus the typical funding fee that varies by currency.
  • Making purchases online​: You can use your PayPal balance and linked payment sources to easily make purchases across various websites for goods and services. There's a PayPal button at checkout, and then you're prompted to log in, select your desired backup payment source (if your PayPal balance won't fully cover it) and verify the purchase. If it's a subscription, you may need to agree to the terms for recurrent payments as well.
  • Using the PayPal debit card​: If you want the most flexible option for using your PayPal cash balance, request a PayPal Cash Card, which serves as a debit card for online, in-person and ATM transactions. It has the Mastercard logo for wide acceptance, and you can get money out for free if you use a MoneyPass ATM. As a bonus, you can use the card at certain locations to add money to your PayPal cash balance, if needed.
  • Withdrawing money at Walmart​: For a ​$3​ fee, you can get cash directly from your PayPal account at Walmart stores. You need to use your PayPal app and go either to the service desk or Money Services area. You'll find a "Get Cash at a Store" option through the "More" menu on the PayPal app. Just provide the withdrawal amount, agree to the fee and get a code to show the Walmart employee so you can get your cash.
  • Using Xoom​: Similar to Western Union and MoneyGram, Xoom allows you to send money that others can pick up locally or get in their bank accounts around the world, even if they're not PayPal users. This PayPal service works for more than ​130 countries​ and will charge you a transaction fee depending on the amount and currency.

Considering Other PayPal Features

While PayPal started out as a basic system for receiving and sending funds, it's since added more features and collaborated with other organizations to expand what you can do with your account. You can find these by looking for the "More" menu option on the website and app to see an expanded list.

For example, you can make donations to charities, set up a virtual card for even more security, pool money with friends and set up savings goals for future purchases. There's also an option to set up an investment account through Acorns so that you can manage that account alongside all your other PayPal transactions. Other additions include the ability to buy cryptocurrencies, split bills, use installment plans, make invoices and estimates, and find deals and offers when shopping online.

Now that you've learned all about PayPal fees, features, benefits, disadvantages and the many ways you can get and use funds, you know what you need to get started with the service.