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What is a Money Order?

Robinhood LearnJune 30, 2020
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
definition

A money order is a paper remittance, much like a check, that’s used for making payments. A key difference is that it’s paid for using guaranteed funds.

🤔 Understanding a Money Order

A money order is a popular choice for making a payment in a relatively secure way. The issuing institution guarantees the funds deposited. For this reason, it isn't as risky as personal checks that can bounce due to insufficient funds in the payer's account. However, as with all payment methods, there are some drawbacks -- like limits on the amount you can send. So if you’re considering using a money order to send or receive money domestically or internationally, it’s also worth considering the alternatives.

example

Let’s say you have a nephew who is currently enrolled in college. You want to help him out with his personal finances by giving him money for rent. Since you have the cash available, you decide to send him a money order.

You buy the money order from the post office because it's a convenient way for you to send the money and for him to collect it. You then pay for it using your debit card, and keep the receipt as proof of purchase, in case anything goes wrong.

All that would be left is to send the money order to your nephew. When it arrives in the mail, he takes the money order to his local post office, and by verifying his ID, he simply withdraws the money.

Takeaway

A money order is like a personal check with a guarantee...

Cashing checks only works if the sender’s checking account has sufficient funds (or adequate credit facility, like overdraft protection) at the time the payee presents the check. But with a money order, the institution acts as an intermediary. It receives full payment from the payer and guarantees the availability of cleared funds for the payee.

Tell me more...

What is a money order?
Why are money orders used?
How does a money order work?
What’s the difference between a money order and a check? Which is safer?
How can you get a money order?
How long does it take for a money order to reach its destination?
What are the limitations of money orders?
Which money order scams should you be aware of?
What are the alternatives to money orders?

What is a money order?

A money order is a paper payment certificate. Only the prescribed payee can redeem the money order for its face value. With a money order, you can send or receive funds almost anywhere domestically or internationally. All you need is an issuing institution (aka issuer) that has branches both the payer and payee can access. A money order is a relatively secure method of transferring money because the identity of the payee is verified at the point of receipt. Additionally, funds guaranteed by trusted institutions make money orders a credible means of sending money.

Why are money orders used?

You can use a money order for a variety of purposes — like sending money to someone who doesn’t have a bank account. The recipient simply presents the certificate at a participating branch and exchanges it for cash once they’ve shown proof of ID.

A money order is also helpful when trying to pay vendors that don’t accept personal checks through the mail. It’s beneficial for both parties — They don’t have to risk your check bouncing, and you don’t have to worry about compromising your personal information. After all, a certified check would display your bank account number and names of joint account holders. Additionally, if you want to send cash to someone but can’t perform a bank transfer, you can use a money order to avoid sending cash by mail.

How does a money order work?

A money order payment is relatively simple to perform.

Let’s say you’re the person sending the funds. You would need to go to the branch of an issuer (like your local post office) to make the purchase. At the counter, you’ll write down the amount of money to be sent and the full name of the payee (the recipient).

Next, use the guaranteed funds to pay the cashier. They usually accept either cash or a debit card. Credit card payments aren’t always permitted as an acceptable form of payment. Issuers who do allow credit card payments typically charge for the transaction as a cash advance. This attracts a higher processing fee than if you paid by cash or debit card.

In addition to the sum deposited, you’ll pay a small fee to cover the cost of administering the service. This fee usually comes in the form of either a percentage of the overall amount or a flat fee — It just depends on the issuer. Once you’ve paid, you’ll get a receipt of purchase just as if you bought a product at the cash register.

When the transaction is complete, the cashier will hand over both the money order and a receipt as proof of purchase. Now you can take the order and send it to the payee by mail — with an additional postage charge.

If you’re the payee wanting to receive cash, there are usually three places you can cash in your money order:

  • Your bank
  • A branch of the institution which issues the money order
  • Venues like check-cashing stores or convenience stores

There are some advantages to cashing in your money order at a branch of the issuing institution. Common advantages are lower fees and quicker access to receiving the payment.

What’s the difference between a money order and a check? Which is safer?

A money order is usually a safer way of sending and receiving payment compared to a personal check.

This is because the money is released to the issuing institution right away with a money order. However, with a personal check, fulfilling payment relies on the payer’s bank account having sufficient funds at the time of the payee’s attempt to cash in.

How can you get a money order?

You can buy money orders from a cashier at the branches of issuing financial institutions. Companies like Western Union have global branches that make it a very practical solution for sending money securely abroad.

Domestic providers like the United States Postal Service, Wal-Mart, or grocery stores also offer a well-distributed nationwide network of locations.

How long does it take for a money order to reach its destination?

A money order will get to the payee as quickly as the mail service permits. The time of its arrival will be dependent on the quoted postal delivery times. If the issuing institution is open, the payee can cash the money order as soon as it arrives.

What are the limitations of money orders?

Money orders are not always the best solution for making a payment. One reason for this is that they typically have a maximum amount that you can process in one payment. This maximum usually sits at around the $1,000 mark for domestic money orders — and slightly less for international money orders.

If you need to pay someone with a money order and the amount you have in mind goes beyond the limit, there are two ways around this. One option is to send multiple money orders to the payee. You could also opt for a cashier's check, which is issued by banks and credit unions and allows for larger payments. You can get these at your local branch, and the funds are guaranteed, just like the money order.

Another limitation with money orders is the difficulty in canceling them. What happens if you want to stop a payment? If your money order has already been cashed, it can’t be canceled or refunded. However, if the payee hasn’t collected the funds yet, the payer can contact the provider and with proof of purchase, a cancellation form, and a fee attached — The issuer may permit cancellation. This would mean that the money order would no longer be valid, and couldn’t be redeemed by the payee.

Which money order scams should you be aware of?

There are several well-known scams involving money orders. One method of theft occurs when someone writes their name and address over the legitimate payee's details, in the hopes that an unsuspecting cashier will give them the money instead.

Another more convoluted scam is when someone forges a fake money order to pay for something and writes a larger sum than what was requested by the vendor. The scammer then claims a partial refund from the vendor for the supposed 'overpayment' or extra money.

After they have reimbursed the payer for an overpayment, the vendor in question may find that the original money order was a fake. Because the institution rejects the forgery, the vendor in the exchange will lose their overpayment refund money.

What are the alternatives to money orders?

There are many common alternatives to paying by money order.

Here are just a few of the other payment options available: 1. You can buy a MoneyGram online as well as in-branch — This is a key difference compared to a money order. Using this system, payments can also be received by the payee as a deposit into their bank account. 2. E-transfer stands for Electronic Funds Transfer (EFT). This method allows for the paperless transfer of money directly between bank accounts. Both parties must have valid bank accounts. The term E-transfer encompasses bank and wire transfers. 3. PayPal enables you to transfer money and make purchases online without having to input your bank account details for each transaction. You’ll need an assigned bank account should you want to withdraw or send money. 4. Venmo (owned by PayPal) is a mobile payment and social media app. It’s a convenient way for friends and family to split payments, send money gifts, and keep in touch. Some approved merchants offer the option of paying by Venmo during their online checkout process. Currently, both senders and receivers of Venmo payments must live in the US.

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