How Do Money Orders Work?
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What is a Money Order?
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A money order is a negotiable instrument used to transfer funds from a payer to a payee. The issuer of a money order takes full payment for the amount of the order, plus a fee for the service, and then gives the payer a printed document that resembles a check. This money order is then endorsed to any payee, who can redeem it either through the issuer of the money order, or more frequently through his bank. The bank, in this case, would ultimately be responsible for collecting the funds from the issuer of the money order.
Benefits
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Money orders are popular ways of guaranteeing payment. Many businesses will not accept personal checks because they can take several days to clear. A money order, on the other hand, is guaranteed by the issuer, who has already collected the funds backing the instrument. Unlike checks, money orders don't expire and are less expensive for the payer than securing a wire transfer. Because selling money orders does not require the issuer to finance the instrument, they are now commonly available through grocery stores, convenience stores and check cashing stores, in addition to the traditional sources such as a bank or U.S. post office.
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Fraud
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Though money orders are generally more reliable than personal checks, they are susceptible to certain kinds of fraud. A bank can mistakenly accept counterfeit money orders and then later dishonor it when the funds are not available from the supposed issuer. In the meantime, the felonious payer, might have made off with goods or services purchased with the fake document. More elaborate scams, such as the "work at home" ploy, involve an offer to pay a percentage of a money order to an unsuspecting party who provides the service of cashing the instrument. When the funds are initially credited to the victim's account, he transfers the funds to the huckster who provided the bad money order. Soon after, the victim's bank dishonors the money order and demands a full refund from the victim. Similar rip-offs involve an elaborate cover story about money stuck in a foreign country or are perpetrated through online auctions.
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