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What Is PayPal And What Are The Pros And Cons?

Dan Miller5-minute read
January 22, 2021

PayPal is an online payments company that allows people to send money to others. PayPal was one of the original web payments companies and was purchased by eBay in 2002. In 2015, PayPal was spun off from eBay and today remains a separate, publicly traded company. PayPal is free to set up and easy to link to a bank account, debit card or credit card in order to send money to others.

What Is PayPal?

PayPal allows its users to easily send money to friends, family, business associates and more. In order to start sending and transferring money via PayPal, you will first need to set up an account. Setting up an account with PayPal is free and only requires an email address and some basic information.

Once you have a PayPal account, you can both send and receive money from anyone else with a PayPal account. If you’re trying to send money to someone without a PayPal account and they ask you “What is PayPal?”, you can show them how to sign up for a free account. It is free to send money to family and friends. PayPal will charge a small processing fee if you use it to send money as part of a business transaction.

One of the most common uses of PayPal is to pay for wins in eBay auctions. While it’s not required to pay for your eBay auction with PayPal, because of the relationship between the two companies, it is a common usage of PayPal. PayPal also acquired Venmo, another online peer-to-peer payment service, in 2013. This means that regardless of whether you use PayPal or Venmo, your online payment is being processed by the same company.

PayPal Credit

PayPal Credit is billed as a revolving credit line that you can access through your PayPal account. With PayPal Credit, you don’t have an actual physical credit card. Instead, you can use your PayPal Credit account anywhere that accepts PayPal. Like most credit cards, you’ll be charged interest and/or fees if you don’t pay your balance in full each month.

Venmo does offer a physical card, the Venmo Mastercard, which can be used at any merchant that accepts Mastercard. That makes it convenient to use your Venmo balance at more traditional merchants. While the Venmo Mastercard does have some built-in functionality regarding overdrafts, it’s more correct to think of the Venmo Mastercard as a debit card (tied to your Venmo balance) than a true credit card.

PayPal Cash

PayPal Cash is the account that holds any money you have with PayPal. PayPal Cash was introduced as a separate feature in 2019.

Now, when someone sends you money via PayPal, you can choose whether to transfer it to your own external bank account, or keep it in your PayPal Cash account. You can use any money that you have in your PayPal Cash account to send to family and friends or to make purchases in some cases, without having to connect to an external bank account. You also have the option to use your PayPal Cash balance to pay via Google Pay or Samsung Pay.

How PayPal Works

PayPal works as a service platform between two people (or businesses) wanting to exchange money. If you’re looking to send money to friends and family, there is no charge. If you’re sending money as part of a purchase or as payment for a service, PayPal will take a small processing fee out of the amount before passing the balance on to the recipient.

If you’re a business owner looking to accept PayPal as a form of payment, you’ll first need to create a PayPal Business account. While you can sell things with a personal PayPal account, if you own a business and you’re looking to streamline your operations, a PayPal Business account may make more sense. Both types of PayPal accounts offer fraud protection, enhanced security and encryption for all transactions.

PayPal Pros And Cons

Here are some PayPal pros and cons to keep in mind:

Pros

  • PayPal is easy to use – it’s very a straightforward way to send money to friends and family.
  • Paying with PayPal gives you an extra level of security and fraud prevention. If you pay for a purchase using PayPal that ends up being fraudulent, PayPal can help get your money back.
  • PayPal encrypts your bank or credit card information, keeping that information safe.
  • No fees for sending money to friends and family.

Cons

  • While it is free to use PayPal to send money to friends and family, if you are sending money via PayPal as part of a business transaction, you’ll be charged fees.
  • PayPal also charges a 1% fee if you want instant access to your money; a free bank transfer takes several days.
  • PayPal has a reputation for being very aggressive with account freezes. And if they decide to freeze your account, they hold your money until you can prove that you have done nothing wrong.

PayPal Alternatives

In addition to Venmo (a subsidiary of PayPal), there are a couple of other payment services that operate in a similar niche to PayPal. Here are a few that you might want to be aware of:

Apple Pay

Apple Pay is a system for sending and accepting payments backed by Apple, and integrated tightly into its iPhone app. With Apple Pay, you can make contactless, secure purchases anywhere that accepts Apple Pay. You can decide via the app whether the money for that purchase should come from your bank account, debit card or credit card.

Google Pay

Google Pay is a payment network backed by Google. With Google Pay, you can store your credit card or payment information inside your Google Wallet. Then, you can use your bank card, debit card or credit card to pay merchants anywhere that Google Pay is accepted.

Skrill

Skrill has some similarities to PayPal , in that you can store your payment information with the service, and then use that to pay other people. Skrill charges 1.45% plus $0.50 to both receive and send money. If you withdraw your money to a bank account, there are no additional fees.

Dwolla

Dwolla is a payment alternative designed for small and medium businesses to pay customers, vendors and other businesses. Dwolla has a rigorous API and supports large volumes of payments. Currently, Dwolla is available only in the United States.

The Bottom Line

PayPal is one of the largest processors of online and peer-to-peer payments. It is accepted for checkout on many sites around the internet, and is becoming more commonly accepted at brick and mortar establishments.

For more information about PayPal and other financial topics, check out our Personal Finance articles on Rocket HQSM.

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    Dan Miller

    Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free/cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.