What is PayPal and How Does It Work?

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With over 305 million users worldwide, PayPal is a household name in the payment processing world.

PayPal was designed to make online shopping and money transfers fast and convenient.

You can use your PayPal account to purchase or sell goods and services, make or receive donations, or exchange cash. In short, it serves as an electronic alternative to traditional payment methods like checks and money orders.

Let’s take a closer look at what PayPal is and how it works.

What is PayPal?

PayPal home page

In its words, PayPal allows users to “securely, conveniently and cost-effectively send and receive payments online.” All you need is an email address to set up your account and get started.

As a PayPal member, you can:

  • Make purchases through your account using a linked bank account, credit card, or your PayPal balance
  • Send money to other users locally and abroad
  • Request that another user send you money

PayPal Business also allows you to create and send invoices to customers and receive payment directly through your website.

How to Set Up PayPal

Setting up a PayPal account is a fairly simple process. Here’s what it entails.

1. Provide your information

PayPal will ask you to provide your email address and create a password. You’ll need to fill out some personal information such as your name, address, and phone number.

2. Confirm your email address

Before you can send or receive money via PayPal, you’ll need to confirm your email address. Go to “Settings” and select “Update” next to the email address you’d like to confirm. Then click “Confirm this email.”

Once you receive an email from PayPal, click the “Confirm my email” button. You’ll be directed to the PayPal login page to enter your password and complete the confirmation process.

3. Add a debit or credit card

To add a debit or credit card, click “Wallet” at the top of the PayPal home page. Next, select “Link a debit or credit card.” After you add your card information, click “Connect.” Adding a card to your account will allow you to make online payments and receive money.

4. Add a bank account

To add a bank account, again click “Wallet” at the top of the PayPal home page. Then choose “Link a bank account” and provide your banking information. Finally, click “Agree and Link” and verify your bank and routing numbers before clicking “Continue” to complete the process.

Adding a bank account will allow you to make online payments with the money in your account and transfer money to your bank account when you receive it.

Related: How to Open a Bank Account Online: A Step-by-Step Guide

How to Use PayPal

With PayPal, you can send money to family and friends, shop online, and receive payments. Let’s dive deeper into how each of these services works.

Send money to family and friends

Instead of sending a check in the mail, you can digitally send money to your family and friends via PayPal, free of charge. Simply go to “Tools” at the top of the PayPal home page and select “Send Money.”

Then, click on “Send to friends and family.” Enter the email address or phone number associated with your friend or family member’s PayPal account as well as the dollar amount you’d like to send. You can add a note if you wish and click “Continue.” Select your preferred payment method and confirm the transaction.

Shop online

You don’t have to enter a credit card number or any kind of financial information when you make an online payment at one of the millions of websites in the PayPal network.

At checkout, click on the PayPal button to use PayPal as your payment method. You’ll then be directed to PayPal and asked to log into your account, where you can complete the checkout process quickly and securely.

Receive payment

If you’d like to get paid through PayPal, ask the party owing money to send the payment to the email address or phone number associated with your account. As soon as they do, you’ll receive an email notifying you of the payment. You can log into your account and transfer the payment to your bank account or use it for future payments and purchases.

Related: 35 Stores That Give Cash Back on Your Debit Card Purchases

Benefits of PayPal

man using PayPal on a laptop

Here are a few of the most noteworthy advantages to using PayPal for online purchases and money transfers.

Purchase protection

If you purchase an item or service via PayPal and don’t receive it, or what you receive is drastically different from the description, you may be eligible for Purchase Protection.

With Purchase Protection, you may be reimbursed for the full purchase price plus any original shipping costs. You may also be refunded if you’re charged with a transaction you never made as long as you inform PayPal within 60 days.

Return shipping

If you are unsatisfied with a purchase made through PayPal, you may receive a refund for the cost of sending it back. You can be refunded for up to $30 on 12 eligible purchases each year. Once you’ve returned your item, you’ll need to go to the refund request page within 30 days of the return ship date to file a claim.

Easy-to-use app

With the PayPal app, you can send, receive, and access your money from just about anywhere. The app makes it easy to track and monitor your transactions, manage credit, and create savings goals from your mobile device.

In addition, you can use the PayPal app to accept credit and debit card payments. Keep in mind, however, that you’ll have to pay 2.7% for every swipe, chip, or contactless transaction.

User discounts

In addition to being free to use, PayPal also offers deals and discounts to users who shop at its selected retailers. To take advantage of these discounts, visit PayPal’s shopping page and paste the unique promo code into the merchant’s website during the checkout process.

You can sort by category to find the best deal for you. Be sure to check the shopping page often as featured offers and new offers are added on a regular basis.

Related: Credit Card vs. Debit Card: The Difference and Why You Need to Know

PayPal FAQs

If you’re new to the platform, these frequently asked questions can help you determine if the service is right for you.

Is it possible to avoid PayPal fees?

There are no fees for setting up a PayPal account or purchasing good or services through your account.

However, you will be charged a fee if you receive money from a purchase, receive payments from outside your country or region, send personal payments via debit or credit card, or send money from your PayPal account to your bank account using a debit or prepaid card.

Thankfully, there are a few ways you can reduce or avoid PayPal fees:

  • Request to be paid as friends and family.
  • Create a PayPal business account.
  • Charge your customers and clients for PayPal fees.
  • Deduct PayPal fees on your tax returns.

Is PayPal safe?

PayPal is a secure and encrypted platform, safe for both buyers and sellers. As long as you keep your password different from other financial account passwords and don’t click on any suspicious email or website links, you’ll likely have a safe and enjoyable experience.

It’s important to note that while PayPal is a safe way to make payments, there is no method that is completely risk-free. Data breaches may still occur.

Is using PayPal better than a credit or debit card?

Using PayPal for online shopping is generally more secure than a credit or debit card because it prevents the seller from seeing your credit or debit card number. The financial information you provide for your account is encrypted for protection against fraud and identity theft.

Can you use PayPal to send money overseas?

As a PayPal member, you can send money overseas to more than 200 countries. All you have to do is go to the “Send Money” tab, enter your recipient’s phone number or email address, and type in the amount you’d like to send.

PayPal will then provide you with a total transaction cost, including transfer fees and the currency exchange rate. Users can withdraw funds in 56 currencies, hold balances in 25 currencies, and receive money in more than 100 currencies.

Using PayPal is Easy and Convenient

Whether you’re an avid online shopper, looking for a convenient way to collect business payments, or would like a simple tool to send money to friends and family, PayPal is an invaluable resource. By creating an account, you can join the millions of people who use PayPal every day to spend, send, and receive money.

Anna Baluch

Anna Baluch is a freelance personal finance writer who enjoys writing about personal finance topics including mortgages, retirement, insurance, and investing. Her work can be seen on LendingTree, Business Insider, Experian and other well-known publications. Anna lives in a suburb of Cleveland, Ohio and holds a bachelor's degree in marketing.

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