How Does a Money Order Work?

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A money order is a convenient, widely accepted form of payment. You can use money orders in lieu of cash or checks to make payments in person or through the mail. Regarded as a "safe" payment option, various types of money orders are available through banks, money services businesses and even the post office.


Negotiable Instrument

Money orders are one of the many types of payments classified as negotiable instruments under the Uniform Commercial Code. A negotiable instrument is payable on demand or payable at a particular point in time. Unlike checks, which are tied to a particular bank account, money orders are obligations of the issuer. You purchase a money order for the face value plus an additional service fee. The issuer has an obligation to redeem the money order at face value. At issue, money order are blank. You must write in your name as the purchaser and the name of the payee.


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Guaranteed Funds

You can only buy money orders with guaranteed funds, such as cash or money transferred electronically from your bank. This means there is no risk of loss to the issuer or the payee. Under banking regulation CC, financial institutions can't typically place holds on money orders issued by banks or the post office. Consequently, merchants more readily accept money orders than personal checks which can bounce if the attached account lacks sufficient funds.


Types of Money Orders

Money orders have a maximum face value of $1,000, whether bought through banks or the post office. Bank money orders typically cost more than postal money orders, because bank money orders are insured and this cost is passed onto the customer. Prices for money orders issued by retailers and money services businesses vary greatly. Technically, these money orders work in the same way as bank or postal money orders. However, banks can place holds on deposited money orders that were issued neither by a bank nor the post office.


Lost Money Orders

Due to banking regulations, you can't technically place a stop payment on guaranteed negotiable instruments like money orders and cashiers checks. After a period of 90 days, you can request a replacement if you sign an indemnity agreement that protects the bank from losses related to the missing item. You can request a replacement for a lost postal money order as long as the item hasn't been cashed. Policies for a lost or stolen money order vary among other firms that sell money orders.