What is PayPal? A complete guide

PayPal dominates the digital payment scene. It has upwards of 426 million active users in more than 200 countries and facilitated 6.6 billion payment transactions in Q2 of 2024 alone.

Since 1998, PayPal has been giving consumers alternative ways to make purchases and to send and receive money online. PayPal lets you pay for things online with a bank account instead of a credit card and keeps your payment information hidden from merchants. It also makes sending money easy and, in most cases, free. PayPal has essentially made checks and costly wire transfer services obsolete.

Decades since its founding, PayPal remains a top choice for online shopping and money transfers. Here’s what you need to know to get started with PayPal.

What is PayPal and how does it work?

PayPal is an online payment system that makes paying for things online, including sending and receiving money, safe and secure.

When you link your bank account, credit card or debit card to your PayPal account, you can use PayPal to make purchases online with participating stores. PayPal serves as a middleman between your bank and merchants and keeps your payment information secure.

You can also use PayPal to securely send money to friends and family as well as receive money from people. This feature is useful for splitting rent with roommates, for example, or receiving money for your birthday.

What is PayPal Credit?

PayPal Credit is PayPal’s credit line program. It’s like a virtual credit card, but it can only be used to make online payments on websites that accept PayPal. Just like a traditional credit card, PayPal Credit lets you defer payments.

What is the PayPal Cashback Mastercard®*?

Need even more flexibility in the way you pay for purchases? PayPal also offers a traditional credit card that earns 3 percent cash back on purchases made through your PayPal account and on money sent to other PayPal users when using your card. It earns 2 percent cash back on all other purchases. The PayPal Cashback Mastercard can be used wherever Mastercard is accepted.

What is PayPal Pay in 4?

PayPal also offers a buy now, pay later program called Pay in 4. This program lets users split up purchases into four equal payments over six weeks. There is no interest or fees associated with this program, and you can pay off purchases between $30 and $1,500.

What is PayPal Pay Monthly?

PayPal offers an additional buy now, pay later program called Pay Monthly. This program is intended for larger purchases of $199 to $10,000, however, you must obtain credit approval to be eligible. Purchases are subject to an APR of 9.99 percent to 35.99 percent and paid off through monthly installments over a period of six, 12 or 24 months. With that said, PayPal Monthly comes with no signup fees or late fees — plus you don’t have to put any money down on your purchase.

Why use PayPal?

Secure transactions

When you use your debit or credit card to pay for things online, merchants can sometimes access your payment information. PayPal provides an extra layer of protection by ensuring that merchants never see your sensitive data. PayPal also uses a number of features to keep accounts secure, including end-to-end data encryption, optional two-factor account logins and email confirmations for transactions.

Easy and convenient

PayPal is accepted at over 35 million sites across the world, including both online and offline retail stores. In addition to using your linked bank account or PayPal balance to pay, you can also use PayPal to pay with a linked credit card or debit card. That way, if you don’t have your card handy, you can simply log in to your PayPal account or use the PayPal app to pay in person.

Is PayPal free to use?

Creating a PayPal account is free and online purchases and most personal transactions are also free. PayPal does, however, charge fees for certain types of transactions.

Fees for purchases

There are no fees for making purchases online with retailers that accept PayPal as long as there’s no currency conversion involved. There is a 3 percent or 4 percent foreign transaction fee for purchases made in a foreign currency.

Fees for personal transactions

When you send money to or receive money from friends and family for personal reasons (and not for any sort of commercial reason), PayPal considers this a personal transaction. PayPal has a special “Friends and Family” tab you can click when making personal transactions. Some of these transactions attract fees while others don’t, mostly based on where you’re drawing the funds from and where you’re sending them.

If you use your PayPal balance, bank account, or Amex Send Account, there is no fee for a domestic personal transaction and a 5 percent fee (between $0.99 and $4.99 USD) for an international transaction. If you send money using a debit or credit card, you’ll be charged 2.9 percent if it’s domestic and 5 percent if it’s international, plus a fixed fee that varies depending on your country ($0.30 USD for payments originating in the U.S.).

Sending money via Visa+ to Venmo Visa+-enabled digital wallets is free, while sending money to other digital wallets incurs a 1.75 percent fee (between $0.25 and $25).

Is there a fee to receive money through PayPal? Generally speaking, no. It’s free to receive money from a friend through PayPal as long as there’s no currency conversion involved.

Fees for withdrawing money

While there’s no fee to transfer your PayPal account balance to a local account, you’ll have to wait for the funds to go through. If you want instant access, you’ll have to pay a 1.75 percent fee. In addition, drawing a check from your PayPal account comes with a $1.50 fee per withdrawal.

Other fees

Although not as common, there are a few other fees you may encounter when using PayPal. These include various fees for buying, selling and transferring cryptocurrencies as well as some possible fees for receiving and sending donations.

How to make a PayPal account

Before you open a PayPal account, you need to decide what kind of account you want. PayPal offers two types of accounts: personal and business.

Personal PayPal accounts

A personal PayPal account is the most common account for individual use. It’s all you’ll need to send and receive money or to use PayPal to make purchases online. This account also lets you access your purchase history, link new bank accounts and add credit cards to your account.

Business PayPal accounts

PayPal also offers accounts that allow businesses to accept PayPal payments online as well as credit cards and debit cards online or in person, even if your customers don’t have PayPal accounts. Service-based businesses and professionals can also send invoices to clients and receive PayPal online payments securely.

How to create a PayPal account

You can create a PayPal account from your computer, mobile browser or directly through the PayPal app. Here are the steps you’ll need to follow:

1. Go to paypal.com or download the PayPal app from the App Store or Google Play.
2. Click the blue “Sign Up” button.
3. Select “Personal Account.”
4. Enter your email address.
5. Add your phone number, and you’ll receive a text with a security code to enter on the next screen.
6. Enter a secure password.
7. Next, enter your legal first name, last name and mailing address. Click the button at the bottom and agree to PayPal’s privacy policy to create your account.
8. Finally, add a credit card, debit card, or bank account to your PayPal account.

How to send money via PayPal

There are several ways to send money via PayPal. The method you choose depends on who you’re sending money to, for what reason and what medium you want to use.

How to send money via PayPal to friends and family

Whether you want to send money to a roommate for your share of the rent or shower your niece with cash on her birthday, follow these instructions for paying friends and family via PayPal:

1. From the PayPal app or your online PayPal account, hit the “Send” button.
2. Enter the name, username, email address or phone number of the person you want to send money to. You can also scan your friend’s PayPal QR code for a quick start. If the person doesn’t already have a PayPal account, they’ll be able to claim the money by making a free account.
3. Enter the amount you want to send. You have the option to add a message, which could be a useful reminder to you and the recipient what the money’s for. For example, you could enter “July rent” or “Happy birthday, Georgia!”
4. You’ll be asked what your PayPal online payment is for: “Friends and Family” or “Goods and Services.” The latter triggers a fee that the receiving account has to pay, so make sure you select the right option.
5. You’ll also be asked how you want to pay. Select your payment method from any accounts or cards you’ve already linked to your account, or you can add a new one.
6. When you’re ready, review your selections and click “Send.”

How to send money via PayPal for products and services

Let’s say you hire a landscaper to mow your lawn and you want to use PayPal to pay the bill, or you run out of cash at a flea market and want to buy something from a vendor who accepts PayPal. This is how to send money for products and services via PayPal:

1. If the vendor has a QR code, hit “Scan/Pay” in the app to get started.
2. Otherwise, from the PayPal app or your online PayPal account, hit the “Send” button. Then enter the name, username, email address or phone number of the person you want to send money to.
3. Enter the amount you want to send. You can add a note (e.g., “Lawn mowing” or “Antique dresser”) to remind the merchant and yourself what the payment is for.
4. PayPal will ask you whether you’re sending money to “Friends and Family” or paying for “Goods and Services.”
5. If needed, select your method of payment or add a new one.
6. Click “Send” to finish.

Getting paid through PayPal

Whether you’re wondering how to receive money on PayPal from a friend, how to receive PayPal payments from customers or how to create an invoice on PayPal, getting paid through PayPal is simple. Keep in mind that there are different merchant fees involved with some payment options, so make sure you understand the best choice for your situation.

1. From the PayPal app or your online PayPal account, hit the “Request” button. As an alternative, you can also choose to create an invoice, depending on why you are requesting the payment.
2. Enter the name, username, email or mobile number of the person paying you.
3. Click on either “Request Money” or “Split a bill.” Then enter the amount of money you are requesting and hit the “Request Now” button. You can also add a note explaining what the request is for.
4. Your friend can also initiate a payment through PayPal to send you money by entering your email or mobile number.
5. When someone sends you money, you’ll receive a notification via email and/or the PayPal app. The money is deposited into your PayPal account.
6. You can keep the money in your PayPal account to apply it toward future transactions or transfer it to your bank account.

Alternatives to PayPal

Venmo

Venmo is a convenient mobile app that is actually owned by PayPal. Venmo comes with unique social networking features, and standard transfers are free. The company makes money by charging fees for instant bank transfers, sending money via credit card and other services.

Cash App

Cash App enables people to send money and make online and in-store purchases from their phone. You can make purchases with your Cash App using funds from a bank account, debit card or credit card. If you don’t have a bank account, you can sign up for the Cash Card debit card, which is tied to your app’s balance. You can use the debit card, or its digital wallet version, wherever Visa is accepted.

Skrill

Just like its competitors, Skrill lets its users easily send money. Its biggest differentiator is that the tool doesn’t charge foreign transaction fees to send money abroad from the United States. Just make sure to use your account regularly to avoid a $5 inactivity fee. Skrill offers its users The Skrill Visa® Prepaid Card with a digital wallet option. The card has a loyalty program that lets you earn rewards for every purchase.

The bottom line

For over 25 years, PayPal has made it safe and easy to send money online. Whether you want to split a bill with friends or purchase items from an online store, PayPal can help you do it — often without charging any fees.

PayPal even makes it easy to pay in-person using a linked credit or debit card. Simply shop with one of the millions of merchants around the world who accept PayPal, and check out using the PayPal app. Customers can also consider applying for the PayPal Cashback Mastercard® for even greater flexibility.

The information about the Paypal Cashback Mastercard has been collected independently by Bankrate. The card details have not been reviewed or approved by the issuer.