Money Order

Financial Dictionary -> Banking -> Money Order

What is a Money Order?

A money order is a financial instrument with which one person (the buyer of the money order) transfers a certain sum of money to another party (the recipient of the money order). The process of using this instrument can be described as follows.

The buyer goes to a local post office, a grocery store, or some other establishment that sells money orders and asks them to buy for one for a certain amount. The buyer provides the data of the person who should receive the money order. Then, he or she pays for it to the issuing establishment which ships the money order to the specified address. In its essence, a money order is very similar to a personal check, but it is more secure than the latter because the transferred sum of money is paid upfront. In addition, there is no risk of money loss, such as the one associated with invalid personal checks.

In the typical case, a money order does not have an expiry date, which means that the recipient can cash it at any time of his or her convenience. Among the other advantages of this method of payment is that you do not have to own a bank account to use it. In fact, anybody who has enough cash with him or her can purchase a money order and transfer money to a second party. What is even better, there are no age requirements for the buyers of money orders - practically anyone can purchase them.

There are, however, some drawbacks to using this method. One of them is the limit imposed on the sum of money which can be transferred. As a rule, the issuing companies would decline to process sums larger than five hundred dollars. For this reason, if you want to send a larger amount, you are advised to use a cashier's check, which you can purchase from any large national bank.

Another drawback of money orders is that the issuing company would charge a fee for any money order that you purchase. That is why, it would be prudent to always ask for the fees charged before buying a money order from a post office or another establishment. In this way, you can save a pretty chunk of your hard-earned money.

The money order system was invented by a private English company in the first half of the eighteenth century. The idea, however, did not get good hold and was abandoned about a century later. While the first money order service was expensive, in 1836, it was sold to another company that lowered the fees. This policy line increased the popularity of the service while still making the product reasonable profitable. Noting the profitability and success of the system, the Post Office took over it in 1838. The further reduction of fees made the system increasingly popular. Luckily, at that time it was transplanted in Continental Europe, India, and the United States and since then, it has become one of the most popular methods for transferring money around the globe.