What is PayPal? And How Does it Work?

Written by Jordan BlansitUpdated: 29th Sep 2021
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PayPal is the online payment service that has rendered checks, wire transfers, and expensive money transfer options all but obsolete.

This modern-day financial firm is ubiquitous, synonymous with simplicity and ease, and an ever-growing presence.

Whether you need to send $50 to your grandson or $500 to Amazon, over 392 million users around the globe entrust PayPal with their money. But do you?

PayPal Pros and Cons


  • Clean website and mobile app
  • Extra security and fraud prevention keeps merchants from accessing your payment information directly
  • Free to send money or make purchases when using your PayPal Balance, bank account, or Amex SendTM Account
  • High transfer limits ranging from $4,000 to $60,000 per transaction
  • Live phone support 12 hours per day, plus social media and in-app messaging


  • Variable fees for using PayPal as a seller
  • 2.9% plus 30 cent fee for transferring funds using your debit card, credit card, or PayPal Credit account
  • Up to 26.99% APR on PayPal credit cards
  • 1% fee for instant PayPal-to-bank transfers
  • Reputation for aggressively freezing your account if they suspect fraud

What is PayPal?

PayPal is an online payment and money transfer service that lets you cheaply – or even freely – buy goods and services and transfer money to friends and family without sharing your financial information.

You can fund your cash by linking your bank account, make payments using PayPal as a pass-through for debit and credit card purchases, and even add cash at thousands of retailers nationwide.

Best of all, signing up and using your account is easy:

  • Download the app or go online
  • Provide your name, address, phone number, and email address
  • And that’s it!

You can also use your PayPal account for business transactions – even if your customers don’t use PayPal.

Using PayPal for business comes with options such as sending invoices, requesting funds, and of course, receiving your online payments securely.

>> More: Best Ways to Send Money

How Does PayPal Work?

Once your account is set up, PayPal readily services a variety of needs. But first, you have to fund your account (or at least link your bank account).

One of the easiest ways is to set up free transfers between your bank and PayPal accounts that take a few days to process.

Or you can pay a 1% fee to bypass the waiting period and get your money that much faster.

Alternatively, PayPal can be used as a “pass-through” for your transactions if you choose to pay with funds in your checking account via PayPal online.

Keep in mind that payments using your PayPal or bank account balance are free – but debit, credit, and PayPal Credit transactions cost a percentage plus a flat fee.

But PayPal doesn’t impose the same daily balance limits as most bank accounts; in fact, if you’ve provided the proper identification, you can send up to $60,000 per transaction!

Friends and Family Transfers

One reason this financial giant has grown so big is the ease – and speed – with which you can send money to friends and family.

Rather than waiting days for a bank account transfer to go through, family and friends will receive funds in just seconds.

All you need is the recipient’s cell phone number, email address, first and last name, or PayPal username.

And if your friends or family want to send you money instead, it’s just as easy! It’s also possible to send a request for funds if you’re strapped for cash or owed for services, utilities, or other bills.

Pay Online

PayPal’s growing popularity means that hundreds of thousands of online merchants around the world accept PayPal transactions, including big names such as Best Buy, eBay, and Walmart.

Simply select “PayPal” as your payment method at checkout, log into your account to authorize the transaction, and voila!

Buy In-Store

With PayPal’s contactless app, your mobile phone functions as a terminal to pay at thousands of brick-and-mortar merchants via their one-time QR code technology.

Alternatively, you can use their debit or credit cards to cover your transactions.

PayPal Products and Services

PayPal Cash Plus

PayPal Cash is where you park your funds when you’re not spending them – in other words, your PayPal balance.

You can use your balance to make purchases, send a gift to friends or family, or even link to Google Pay or Samsung Pay.

PayPal Credit

PayPal Credit is this service’s virtual-only credit card that lets you make purchases now and pay in installments.

While it comes at a hefty 23.99% interest, you can avoid interest entirely on purchases over $99 by paying them off within six months.

Keep in mind that PayPal Credit only works at merchants that accept PayPal transactions.

Credit Cards

Aside from PayPal Credit, this service also offers two “real” credit cards as well.

The PayPal Cashback Mastercard® lets you shop anywhere that Mastercard is accepted, all while earning unlimited 2% cashback on every purchase.

You can redeem your Cash Rewards right to your PayPal balance at any time – and best of all, they never expire!

Or you can opt for the PayPal Extras Mastercard®, which racks up variable points based on your spending categories.

You can redeem these for gift cards, travel vouchers, or as cashback to your account.

Plus, with either of these cards, you’ll enjoy all the benefits of being a Mastercard holder at variable interest between 19.99% and 26.99%.

Debit Cards

PayPal also offers the PayPal Cash Mastercard®, a debit card linked to your PayPal Cash Plus account.

Just like its Mastercard credit cards, you can shop in-store or online anywhere that Mastercard is accepted – and even make fee-free withdrawals at over 33,000 MoneyPass® locations nationwide.

Best of all, there’s no monthly or annual fee, minimum balance requirement, or credit check involved!

Prepaid Debit Cards

PayPal Prepaid Cards let you transfer money from your account to a Debit Mastercard you can use anywhere that Mastercard is accepted.

You can also get paid two days faster with early direct deposit to your prepaid card, add money at over 130,000 Netspend Reload Network locations, and even open an optional tiered-rate Savings Account.

Pay in 4

“Pay in 4” is PayPal’s buy now, pay later solution. If you select this option while shopping online, PayPal will split your payment into four interest-free installments, due once every two weeks.

PayPal Features and Benefits

Touch-free Payment Capabilities

With PayPal’s mobile app, you can buy goods and services online or in brick-and-mortar stores without ever touching a payment terminal.

Just load up your phone and use the provided QR code at thousands of grocers, restaurants, kiosks, and even farmers’ markets around the nation.

Easy-to-Use Debit Card

Of course, there’s PayPal’s Mastercard as well, which links to your Cash Plus account instead of a traditional checking account.

Shop in-store or online anywhere that Mastercard is accepted and pull funds straight from your PayPal balance.

Send & Receive Money

PayPal is one of the most popular services for sending money online instantly, safely, and even freely.

Its widespread use and a multitude of payment options make it ideal for transferring funds among family friends, and even roommates.

Direct Deposit

With PayPal’s direct deposit feature, paycheck and government funds deposit up to two days early.

Check Cashing

Check cashing and online-only money services don’t seem like they go hand-in-hand – but with PayPal, they do.

Using their mobile app’s Cash a Check feature, you can follow the prompts and get your money now (for a fee) or in ten days, free.

Add Cash

PayPal partners with over 130,000 Netspend Reload Network locations so you can add between $20 and $500 to your PayPal account at participating retailers in just 15 minutes.

Keep in mind, however, there’s a service fee of $3.95 per completed transaction.

Withdraw Cash

PayPal partners with the MoneyPass® ATM system so you can use your PayPal Debit Mastercard to withdraw up to $400 per day fee-free at over 33,000 locations.

Stellar Mobile App

And of course, there’s PayPal’s clean, innovative mobile app. From here, you can link cards and accounts, conduct transactions, message customer service, access the Help Center, and more!

PayPal Fees Explained

PayPal is free to use when you transfer money to family and friends domestically using your PayPal balance or linked bank account, or when shopping in-store or online.

But as of 2 August 2021, PayPal’s updated fee chart includes charges such as:

Domestic debit card, credit card, and PayPal Credit transaction fees

  • 2.9% of the transaction total plus fixed fee (usually 30 cents)

PayPal to bank account transfer fees

  • 1% of transfer total for an instant transfer
  • $1.50 if you want to receive a check instead of an online deposit

International transaction fees

  • 5% (minimum $0.99, maximum $4.99) on personal transactions when using your balance, bank account, or Amex SendTM Account
  • 5% plus 2.9% plus fixed fee for personal card transactions
  • Fixed fee for receiving personal transactions that involve a currency conversion

Seller fees

  • 1.9% plus 10 cents per QR code transaction over $10
  • 2.4% plus 5 cents per QR code transaction under $10
  • 2.59% plus 49 cents per online credit and debit card transaction
  • 2.29% plus 9 cents per in-person debit and credit card transaction
  • 3.49% plus 49 cents for digital payments

For a full breakdown of PayPal’s consumer and seller fees, you can visit their website.

How Does PayPal Compare?

Wide acceptance, international and domestic payment options and high transfer limits set this financial service apart from much of the competition.

But in some ways, PayPal is not so different than its peers.

#1. PayPal vs. Cash App

Cash App is a financial payment service with a $250 per week transfer limit (unless you provide full identifying information).

You can load your account with funds from your bank account, debit card, or credit card – though, unlike PayPal, buyers are only charged for personal payments when using their credit card.

#2. PayPal vs. Venmo

Venmo is a financial service owned by PayPal that offers many of the same services. You start with a $299.99 per week transaction limit until you complete identity verification.

Once you’ve finished this process, however, you’ll qualify for a limit of $4,999.99 per transfer and per week.

You can pay for goods and services at no extra cost when using your debit or prepaid debit card, or for a 3% fee when using your credit card.

And just like PayPal, you can sign up for a Mastercard linked to your Venmo balance.

#3. Apple Pay vs. PayPal

Apple Pay is a free Apple-backed system for sending and receiving payments. You can fund your account with your bank account, debit card, or credit card. Plus, Apple Pay’s mobile app makes contactless, secure purchases simple and quick.

#4. Google Pay vs. PayPal

Google Pay is Google’s version of Apple Pay. All you have to do is store payment information inside your Google Wallet and use your bank account, debit card, or credit card to pay merchants anywhere Google Pay is accepted – fee-free.

#5. TransferWise vs. PayPal

TransferWise, now known as Wise, is a low-cost online payment service built for sending money internationally.

While they only allow bank-to-bank or card-to-bank transactions, they offer multi-currency accounts, a globally accepted Mastercard Debit Card, and lower international rates compared to PayPal (usually 0.35% to 1.65%).

PayPal FAQs

Is PayPal Safe to Use?

Yes, indeed! PayPal transactions use Secure Sockets Layer encryption on all web pages, as well as anti-fraud technology and 24/7 monitoring services.

And if you buy an item that never shows up or isn’t what was promised, their purchase protection policy guarantees a full refund.

Of course, no financial service is completely fraud-proof, which is why you should report suspicious activity to [email protected].

Does PayPal Have a Monthly Fee?

Nope! However, a number of other fees apply in some circumstances.

What are the Disadvantages to Using PayPal?

While PayPal is free to use as a customer when using your balance or bank account, you’ll be charged for using your debit card, credit card, or PayPal credit lines.

Plus, bank-to-account transfers can take several days, and you’ll have to pay for instant account-to-bank transfers in reverse.

Can You Get Scammed by Using PayPal?

It’s definitely possible to be scammed using PayPal, just as it is with your regular bank account or credit card. To avoid potential scams, be sure to:

  • Check for valid shipping addresses when using PayPal for business and insist on signature confirmation for delivery of high-value items
  • Beware “overpayment” scams where buyers send more money than your products are worth
  • Contact PayPal support about unsolicited or sketchy-looking emails
  • Block customers who file disputes or make fraud claims

Is PayPal Good or Bad?

PayPal is a free service for those who want to make secure online transactions without providing their payment details directly to merchants.

While they do have a busy – and somewhat hidden – fee schedule, they’re also an industry leader in payment services. Whether they’re “good” or “bad” is up to you!

Is PayPal or Venmo Better?

Venmo is owned by PayPal, and the two services offer many of the same features and products.

That said, PayPal tends to be more robust for business transactions, while Venmo might function better for friends and family transactions.

Bottom Line: What is PayPal?

PayPal is one of the most comprehensive online payment services around.

While they have their drawbacks (mostly hidden fees and extended transaction times in some circumstances), this payment firm’s widespread acceptance and ease of use makes it a great choice if you want to send money securely to friends, family, or merchants.

Jordan Blansit
Jordan Blansit

Jordan Blansit is a Senior Writer, Researcher, & Product Analyst for SimpleMoneyLyfe with an inexplicable predilection for mortgages, investing, and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her in the California Redwoods or Oregon Siskiyous. Jordan’s areas of expertise are mortgages, personal loans, credit cards, and investing.