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Money orders are financial certificates or notes used in place of cash in order to make a payment. They do not require the person getting them to have a bank or credit account, so they often are the go-to option when a person isn’t affiliated with a financial institution, or when a seller specifically requests payment under this method. These instruments do not have an expiration date but generally are limited to amounts under $1,000. People typically can cash them without a problem unless the notes are from a foreign country, in which case cashing gets expensive. Available from locations such as banks, grocery stores and the U.S. Post Office, they are sometimes linked to money laundering but still are considered a very safe way to get money to someone else.
What It Is
A money order is a financial instrument that allows a person to make a payment to someone else without using cash, checks, credit or other methods. It has a specified recipient, and, like a check, it always includes an indication of how much the recipient is supposed to get. It represents actual money and can be converted to cash easily, so it is considered to be a cash equivalent.
People used these types of financial notes formally for the first time in Great Britain in 1792 by a private company. It didn't do very well, and in the mid-1830s the system was taken over by the post office. The trend caught on in the U.S. as a safe way to send money and as a guarantee that the money would be available.
In most modern transactions, payment happens through debit or credit cards, or through electronic transfers processed online. People still write checks, but this is becoming less common as the money system becomes more technologically advanced and abstract. A person who gets a money order usually does so because he does not have access to one of these payment methods, which often means he does not hold a bank or credit account.
The fact that anyone with the right amount of cash can buy one of these certificates makes them very popular with teens and young adults. These individuals often haven’t established their own accounts elsewhere, but they still might need to make a payment for which they don’t want to present or send cash. Other adults still use these instruments if they have problems with other payment methods, or if a seller specifically requests a money order.
When a person needs a money order, he goes to a retailer who works with them, such as the U.S. Post Office or a grocery store, and gives the representative the full amount of payment, along with a small processing fee and completed order form. He indicates who the recipient should be at that time. The representative prints the note for the buyer, who then can present or send it to the recipient. It is a good idea to ask ahead of time what the processing fee will be so that the buyer can be sure to bring enough cash to cover the transaction.
Depending on where someone buys a money order, the maximum amount one can be issued for is generally between $500 and $1,000. If a person has to make a payment that’s larger than the limit the issuer has, he can buy more than one note. The downside of doing this is that the issuer will charge him a processing fee for each certificate, not just one, making payment more expensive. Cashier’s checks sometimes are used as an alternative for payments over $500 to $1,000 for this reason.
Guarantee of Payment
A person who buys notes of this type has to pay the amount of the certificate in full at the time of purchase. With payment having already taken place, the buyer is guaranteed to receive the full amount listed. Many companies also put an additional guarantee on the notes they issue. This makes them much safer than sending a cash payment.
An individual who wants to cash a money order has several options available. In general, he can take the certificate to any institution that issues them, such as the post office, and request that it be cashed. These institutions already work with these types of certificates and therefore usually don’t charge to do this. He also may present it to a check cashing service, but these organizations often charge a fee for the service. Someone who has a bank account may opt to deposit it at his local branch as he would a check, as well.
Organizations that cash these financial instruments are concerned about fraud. They usually ask to see the identification of the person cashing the certificate for this reason. Once an agency has verified that the recipient is who he says he is, it usually can proceed with the transaction without further problems.
Issues sometimes arise in cashing this kind of note if it has been issued by a foreign organization. It is sometimes necessary to cash it in the country of origin, change the funds into the proper domestic currency desired and then deposit the funds at a local bank. Going through this process is quite expensive in most cases, so this payment method isn’t ideal for international transactions.
One advantage of these certificates over other payment options is that they do not have an expiration date. This makes them different than checks, which banks no longer are technically obligated to cash after six months, according to the Uniform Commercial Code. Even though these certificates do not expire, people usually cash them fairly quickly, either because doing so is necessary to complete a transaction, or because they are in need of the funds.
Tracing and Fraud
Issuers typically clearly are identified on these certificates. This makes them fairly easy to trace back to the point of purchase. Financial officers cannot always show where the cash used to purchase the instruments came from, however. Combined with the fact that most institutions put limits on how much the note can be issued for, this makes the certificates a way to launder money, because a person can filter cash through money orders purchased through many agencies. Members of law enforcement long have been aware of this problem but have not been able to prevent this type of fraud completely in most areas.