How do money orders work?

Yvonne Hemsey / Contributor
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Money orders are a safe form of payment that can be used as an alternative to a check or cash. These paper documents offer guaranteed funds, but unlike a check, they are prepaid and aren’t tied to a bank account.

Here’s what you need to know about how money orders work.

How money orders work

Several different types of institutions issue money orders, including post offices and grocery stores. With a money order, you pay the issuer the amount you’d like to send plus any fees. The purchase amount, minus fees, becomes the face value of the money order.

Generally, money orders can be purchased for any amount up to a certain number. At the U.S. Postal Service, for example, you can send up to $1,000 with a single money order anywhere within the U.S.

After purchasing the money order, you receive a paper document similar to a check that includes the amount of your payment. On the document, you fill out relevant information including the payee’s name and address, the payment amount, your name and address and what the payment is for. You can then send the money order to the person or institution you’re paying.

The recipient of the money order can cash or deposit it, much like a check.

When to use money orders

There are certain circumstances when money orders can be safer or more convenient than personal checks or cash.

Here are some situations when you may want to consider using a money order:

  • You don’t have a bank account. Money orders are prepaid and don’t require that you have a checking account. They allow you to pay bills and receive payment without being tied to a financial institution.
  • You want to send money in the mail. If you aren’t comfortable mailing a check that contains your bank account information, and you’d rather not mail cash, sending a money order can be safer. Like a check, only the recipient can cash it.
  • You don’t want to bounce a check. Money orders are prepaid, so there’s no chance that the recipient won’t be able to cash or deposit it due to insufficient funds in your account.

How much money orders cost

The cost of a money order depends on where you’re buying it, but it generally ranges anywhere from $1 to $5.

Here’s what you can expect to pay at various places for a domestic money order:

  • U.S. Postal Service: $1.25 for amounts up to $500, $1.75 for amounts of $500.01 to $1,000
  • Walmart: Up to $0.88
  • Kroger: $0.84 with a card, $0.88 without a card
  • Wells Fargo: $5

International money orders aren’t as widely available, and institutions that carry international money orders tend to charge more. USPS, for instance, charges an issuing fee of $10.25.

Where to cash a money order

Money orders can be cashed at a number of different locations, including banks, grocery stores or check-cashing stores. You’ll typically get the best deal, however, by cashing it at the same place it was issued. That’s because some institutions charge a fee for cashing orders from other issuers.

You may also be able to deposit your money order directly into a bank account.

To cash a money order, follow these steps:

  1. Take your money order to a place that will cash it, such as a bank, credit union, grocery store or post office.
  2. Sign the back of the money order.
  3. Present your ID and the money order to the institution.
  4. Receive your payment.

What to do if you lose a money order

If your money order is lost or stolen, contact the issuer as soon as possible and describe your situation. The issuer may be able to replace or refund the lost money order. If your money order hasn’t been cashed, the issuer might be able to cancel it.

Be prepared to provide details, including the money order’s tracking number, purchase date and amount. If you have the receipt, make sure to provide it.

Depending on the issuer, you may have to pay a fee. For example, Western Union charges $15 for a refund if you have a receipt or $30 without a receipt. USPS charges a flat rate of $6.25.

Are money orders safe?

Money orders are generally a safe alternative to cash or checks, since only the payee will be able to cash or deposit it for the amount printed on the document. As long as you keep your receipt, you’ll be able to track your payment and recover any funds if it’s lost, stolen or damaged.

However, it’s important to keep in mind that there are plenty of scams involving money orders. Make sure to verify the funds with the issuer if you aren’t sure it’s legitimate.

Bottom line

Money orders are somewhat of a hybrid between checks and cash. Like a check, they allow you to specify the payee and amount. But because they are prepaid documents separate from a bank account, money orders are as good as cash. There’s no risk that a money order will bounce, like a check. And if it’s lost or stolen, you can often receive a refund or cancel it.

If you’re looking for a secure and inexpensive way to send or receive funds, money orders can be a good option.

Featured image by Yvonne Hemsey of Getty Images.