Whether you’re buying or selling something, a Money order might be your best option (or your only option) for payment. It is considered a safe form of payment, making it a popular alternative to cheques. But it is important to understand the pros and cons of using money orders—and when other payment methods are a better choice, according to www.thebalance.com.
What is a money order?
A money order is a paper document, similar to a cheque, used for making payments. Money orders are prepaid, so they are only issued after a buyer pays for the money order with cash or another form of guaranteed funds.
Guaranteed funds: Because issuers demand payment up front, money orders are considered relatively safe, or guaranteed forms of payment. They should not bounce like personal cheques might.
Specific payee: The name of a payee (the recipient of the money order) and the name of a financial institution that issued the money order will appear on every money order. When you buy a money order, you will specify who should receive the funds by filling in the name of the person or organisation that you wish to pay. This makes it difficult for thieves to steal the instrument and get the money.
Risks: Be aware that money orders are sometimes used in scams, but they are also used for legitimate purposes.
Where to buy: Money orders are available from several sources, including banks. To buy a money order, you will need to pay with guaranteed funds.
Payment: At your bank, you can transfer funds from your current or savings account. At a retailer, you will pay with cash, a debit card transaction using your PIN, or a cash advance on your credit card. Note that credit card cash advances are expensive because you pay additional fees and high interest rates on those balances, so try to avoid that option.
Amount and payee: Tell the money order issuer how much you would like a money order for, and they will print the document for you. You will need to write in the name of your payee on the line that says “Pay to the order of.”
Keep records: Keep your receipt and any other details about your purchase. If something goes wrong, you will need that information to track or cancel the money order.
Cost: Expect to pay a small fee to get a money order. Money orders have a maximum limit.
Getting the money: If you receive a money order, you can cash it or deposit it just like a cheque. To do so, you generally endorse the back of the money order by signing your name. It is best to cash money orders at the same location they were bought from (or the bank that issued them).
If you don’t need cash right now, it is wise to deposit the funds to a bank account for safe keeping.
Why use money orders?
Money orders are one of many options for making payments. So when does it make the most sense to use a money order?
Alternative to cash: A money order can be made payable to a specific person, which reduces the risk of theft. If a money order gets lost or stolen, you can cancel it and get a replacement.
If you lose cash, it is gone for good. Mailing cash is simply too risky, so money orders are a good option when you are mailing a payment. What is more, you can track the payment and prove that your recipient actually got paid.
No bank account needed: If you don’t have a bank account, whether you don’t want one or you can’t qualify for one, money orders might be your best option for making payments.
You can pay bills like utility bills, insurance premiums, and mobile phone charges with money orders each month. However, the cost of buying money orders adds up. That cost, and the time it takes to buy money orders month after month, might motivate you to open a bank account.
Send money overseas: If you need to send funds abroad, money orders are a safe and inexpensive way to do so. The recipient can easily convert a money order to local currency, and money orders are well-regarded in numerous countries around the world.
Alternatives to money orders
Money orders are not the only way to pay. Other options offer guaranteed funds, and some are even safer than money orders.
Cashier’s cheques are similar to money orders. They are both paper documents issued to a specific payee and guaranteed by the issuer. However, banks issue cashier’s cheque.
A wire transfer is an electronic transfer of guaranteed funds. Again, sellers can be confident, even more confident than if they get a money order — that they are getting paid. Wire transfers are more expensive and more cumbersome, but they can’t be faked or cancelled like money orders.
Electronic payments of non-guaranteed funds are also an option. If you are just paying bills, your bank’s online bill payment service can send funds almost anywhere.
Limitations of money orders
Now that you know the basics, you can appreciate the pros and cons of using money orders. Some of the main drawbacks of money orders are described below.
Maximum limits: Money orders are generally issued with a maximum limit. If the purchase amount is more, you will need multiple money orders. Then things become cumbersome and just as expensive as other forms of payment.
Convenience: Money orders are easy to get. Just visit a bank branch. But other forms of payment are much easier to work with.
Trust: Most people believe that money orders are safe. However, money orders can raise red flags because they are often used for fraud. In some cases, money orders are prohibited, or they cause extra administrative work and delays. For example, some financial institutions (like insurance companies and brokerage firms) don’t accept money orders because they can be used in money laundering operations. Likewise, banks might not allow you to use your mobile device to deposit money orders.