GOBankingRates

What Is PayPal and How Does It Work?

7 min Read

bizoo_n / Getty Images

Founded in 1998, PayPal was one of the first widely adopted online peer-to-peer payment systems. Today, this online payment platform has over 300 million active account holders, according to the website.

What Is PayPal?

PayPal offers a peer-to-peer digital payment network that allows people to transmit money to and from family and friends at no cost. You can also use it to make purchases online or in physical stores. In recent years, the online financial service has added features like the ability to buy and sell crypto, make purchases using bitcoin, bitcoin cash, ethereum or litecoin, open a PayPal line of credit or use it to “buy now, pay later” at your favorite online stores that accept the online payment system.

How Does PayPal Work?

To use PayPal to send money to family or friends, you’ll first need to start by creating a PayPal account. Then, link a bank account, debit card or credit card to your PayPal account. After that, you can send and receive money securely between family and friends or make purchases in-store or online.

A Better Way to Bank

Step-by-Step Guide

PayPal acts as a secure go-between to facilitate transactions between your bank and a third party, whether that’s an e-commerce merchant, a store, a service provider or a friend or family member. Setting up your account is a simple process and can be done in just a few steps.

  1. You can set up an account for free on PayPal’s website or by downloading the PayPal app from the App Store or Google Play. You will need to enter some basic personal information.
  2. Once you’ve got an account, you’ll want to link a bank account, credit card or debit card to the account. You can link one card to begin, or link as many accounts as you’d like for more flexibility in managing your money.
  3. When you want to make a payment online, you can simply click the “PayPal” button, log in to your account and pay for your purchase. There’s no need to enter your credit card information on the e-commerce website or worry about creating a virtual transaction number for added security.
A Better Way to Bank

How Do You Send Payments on PayPal?

If you are sending money to a friend or family member, all you need is their email address. Ideally, they already have a PayPal account, and you would use the email address they used for their account to send money.

Then, enter the amount of money and the currency and click “friends and family” to send the money securely without fees. They will get an email from PayPal indicating they have received money. If they don’t have an account set up, they will need to do so using the email address where you sent the funds.

Make sure to select “friends and family” if you are not sending money to a business or service provider. Otherwise, the recipient will pay fees on the amount.

How Can You Accept Payments Through PayPal?

As PayPal is an online platform, there are a few ways to accept payments. Anyone with your email address can send you money as a PayPal user. Make sure they send it as a “family and friends” transaction so you won’t have to pay taxes on money sent as gifts, reimbursements of purchases or things like splitting the bill at dinner.

A Better Way to Bank

You can also set up a PayPal.me link so people can pay you easily with one click.

Potential PayPal Fees

For transactions in a single currency between family and friends, PayPal does not charge fees, but some transactions do come with a fee.

A Better Way to Bank

In short, the sender doesn’t typically pay any fees when paying or sending money with PayPal, unless you are using a debit or credit card or if there is an international transfer involved.

Final Take

PayPal is a fast, easy, secure and well-established way to make purchases and to send and receive money. If you don’t already have a PayPal account, it might be worth establishing one. The payment method is becoming more widely accepted every day and you can also find deals by shopping through PayPal at your favorite online retailers.

FAQ

Here are the answers to some of the most frequently asked questions regarding PayPal.
  • How does PayPal work and how do you get your money?
    • To use PayPal, you will have to create an account. After adding a bank account, debit card or credit card to your account, you can then send and receive money securely or use your account to make purchases. Any money sent to you can stay in your PayPal account balance or be transferred to your bank account.
  • What are the disadvantages of PayPal?
    • Some disadvantages of PayPal are accidentally receiving a payment option as "paying for goods and services" and having to decline the transaction. Another is if you want to transfer money instantly out of your account and into a bank account or linked debit card. This process will cost 1.75% or up to $25. There are also a few limitations on the amounts you can withdraw and transfer.
  • Is there a fee to use PayPal?
    • Though most transactions between friends and family are free, there could be a fee for instant transfer to a bank account, international transfers, linked credit card payments or sending physical checks.
  • Do I need a bank account for PayPal?
    • No, you don't need a bank account to open a PayPal account or to receive money into that account. To open an account, you submit your name, address, phone number and email address.
A Better Way to Bank

Caitlyn Moorhead contributed to the reporting for this article.

Information is accurate as of Feb. 28, 2023. 

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

DIVE DEEPER

Discover the Best Banks of 2024: Unveiling Our Top Picks!

We've compiled a list of the top banks for this year!

TAKE POLL

TAKE ACTION

Here Are the Pros and Cons of Using Multiple Banks

Many banks are one-stop-shop financial institutions...