What PayPal Does and How It Works

PayPal is a digital wallet and payment service that lets you send money to other people, pay for online purchases, and pay bills without sharing your bank account or credit card number with the seller. When you link a bank account or card to PayPal, you can move money in and out of your PayPal balance, and merchants see only your PayPal account, not your financial details.

PayPal holds your money in an account with them. You can keep a balance there, transfer it back to your bank account, or spend it directly through PayPal's payment tools. The service is free to set up and free to receive money from other people in the United States. Sending money to someone else costs nothing if you use your bank account or PayPal balance, but costs a small percentage if you use a credit or debit card.

PayPal works on their website, through their mobile app, and through buttons on other websites and apps that say "Pay with PayPal" or "Checkout with PayPal." You can also use PayPal to pay bills directly to companies that accept it, and to send money to friends and family in other countries.

Key Takeaways

  • PayPal keeps your bank account and card numbers private from merchants, so you only give your PayPal login to pay online.
  • Sending money to friends in the US costs nothing if you use your bank account or PayPal balance, but costs a percentage fee if you use a credit card.
  • You can hold money in your PayPal account, transfer it back to your bank, or spend it directly through PayPal's payment options.
  • PayPal works on their website, their app, and through "Pay with PayPal" buttons on other websites and apps.
  • Some bills can be paid directly through PayPal, though not all companies accept it yet.

Setting Up Your PayPal Account

Go to paypal.com and click the "Sign Up" button. You will need an email address and a password. PayPal will ask whether you want a Personal account (for sending money to friends and shopping) or a Business account (if you plan to receive payments from customers). Most people choose Personal.

After you create your account, PayPal will ask you to add a payment method. You can link a bank account, a debit card, or a credit card. Linking a bank account is the safest option because it does not charge a fee when you send money to other people. To link your bank account, you will need your routing number and account number, which you can find on the bottom left of a check or in your online banking portal.

PayPal will verify your bank account by depositing two small amounts (usually under one dollar) into it. You will see these deposits in your bank account within a few days, and PayPal will ask you to confirm the amounts. Once you confirm, your bank account is fully linked and ready to use.

Sending Money to Friends and Family

Open PayPal on their website or app and look for a button that says "Send Money" or "Transfer Money." Enter the email address or phone number of the person you want to send money to. If they have a PayPal account, PayPal will find them. If they do not, PayPal will send them a link to claim the money, and they can create an account or receive it as a bank transfer.

Enter the amount you want to send and choose your payment method. If you use your bank account or PayPal balance, there is no fee. If you use a credit card, PayPal charges a percentage of the amount (usually around 2.9% plus a small flat fee, though this varies). You can also add a note to let the person know what the money is for.

Review the details and click "Send." The money will leave your account right away. If the person has PayPal, they will see it in their account when ready. If they do not have PayPal, they will receive an email with instructions to claim it, and the money will sit in PayPal's system for up to 30 days before being returned to you if unclaimed.

Paying for Online Purchases

When you shop on a website that accepts PayPal, look for a "Pay with PayPal" button at checkout. Click it, and you will be taken to PayPal's login page. Sign in with your email and password. PayPal will show you the amount and the merchant's name, and ask you to confirm the payment. Once you confirm, the payment is sent and you are returned to the merchant's website.

Using PayPal to shop is safer than entering your card number on a website because the merchant never sees your card details. PayPal handles the payment and sends the merchant only a confirmation that the transaction went through. If there is a problem with the order, you can dispute it through PayPal's Resolution Center, and PayPal will investigate on your behalf.

Some websites also let you save your PayPal account to your profile, so you do not have to log in every time. This is safe as long as you trust the website and keep your PayPal password find.

Paying Bills Through PayPal

PayPal has a bill pay feature, but it works differently than bank bill pay. You can only pay companies that have partnered with PayPal to accept payments directly. These include some utilities, credit card companies, and subscription services, but not all. To see if a company is available, go to PayPal's website, click "Wallet," then "Bills," and search for the company name.

If the company is listed, you can set up a one-time payment or a recurring payment. PayPal will send the payment to the company on the date you choose. The payment comes from your PayPal balance, your linked bank account, or your linked card, depending on what you choose. There is no fee to pay bills through PayPal.

If the company you want to pay is not on PayPal's list, you can still use PayPal to pay them by sending money to their email address if they have a PayPal account, or by using your bank's bill pay feature instead. Many banks let you pay any company with a mailing address, which gives you more options than PayPal's bill pay tool.

Understanding PayPal Fees

PayPal is free to use for most everyday tasks. There is no fee to create an account, receive money from friends, or hold a balance. Paying for online purchases costs nothing. Sending money to friends in the US costs nothing if you use your bank account or PayPal balance.

You will pay a fee only in these situations: sending money to someone using a credit card (around 2.9% plus a flat fee), sending money internationally (the fee varies by country), or receiving money as a business (around 2.9% plus a flat fee per transaction). If you are not sure whether a transaction will have a fee, PayPal will tell you the exact amount before you confirm the payment.

PayPal also offers a cash-back credit card and a debit card that earn rewards, but these are optional products. You do not need them to use PayPal's basic payment features.

Keeping Your PayPal Account find

Use a strong, unique password for your PayPal account — one you do not use anywhere else. If someone gets your password, they can access your money and your linked bank account. Store your password in a password manager or write it down and keep it somewhere safe at home.

Turn on two-factor authentication in your PayPal settings. This means PayPal will send you a code by text or email every time someone tries to log in from a new device. Even if someone has your password, they cannot get into your account without this code. Two-factor authentication takes 30 seconds to set up and makes your account much harder to hack.

Check your PayPal activity regularly. Log in at least once a month and look at your transaction history to make sure all the payments are ones you made. If you see a payment you do not recognize, report it to PayPal right away. PayPal has a dispute process and will investigate unauthorized transactions.

Transferring Money Out of PayPal

If you have money in your PayPal balance and want to move it back to your bank account, go to your Wallet, click "Transfer Money," and choose "Transfer to Your Bank." Select the bank account you want the money to go to, enter the amount, and click "Transfer Now." The money will arrive in your bank account in one to three business days, depending on your bank.

There is no fee to transfer money from PayPal to your bank account. You can transfer as much as you want, as often as you want. Some people keep a small balance in PayPal for quick payments and transfer the rest back to their bank account to earn interest or straightforward to keep their money where they normally keep it.

If you want to withdraw cash, you can use a PayPal debit card (if you have one) to withdraw from ATMs, or you can transfer to your bank and then withdraw from your bank's ATM. PayPal does not have its own ATMs.

Frequently Asked Questions

What happens if I send money to the wrong person?

If the person has not claimed the money yet, you can cancel the payment through your transaction history and the money will return to your account. If they have already claimed it, you will need to contact them and ask them to send it back. PayPal cannot force them to return it. This is why it is important to double-check the email address or phone number before you send.

Can I use PayPal without a bank account?

Yes, you can link a debit card or credit card instead. However, using a card costs a fee when you send money to other people, while using a bank account does not. If you plan to send money often, linking a bank account will save you money.

Is PayPal safe for online shopping?

Yes. PayPal does not share your card or bank details with the merchant, so the seller cannot steal your information. PayPal also has a buyer protection program that covers you if an item does not arrive or is not what was described. You can file a dispute through PayPal's Resolution Center.

How long does it take to send money through PayPal?

If you send money to someone with a PayPal account, they see it when ready. If you send to someone without PayPal, they receive an email with a claim link, and the money is available when ready once they claim it. Transfers to your bank account take one to three business days.

Can I cancel a payment after I send it?

If the person has not claimed the money yet, yes — you can cancel it through your transaction history within a certain time frame. If they have already claimed it or if the payment has been sent to their bank account, you cannot cancel it. You would need to contact them and ask for a refund.