Paypal is a very widely used payment method on the net. Ebay uses it. Other online merchants use it to sell their products. I've used it many times (all for small amounts) and it seems quite secure. However there are a few things to notice with using Paypal. I'll talk about Paypal's "Funding Options".

Paypal - Send Money

When you send money to someone using Paypal, the default payment method may be from your debit account. As you can see in the screenshot above "Instant Bank Transfer" from my savings account is the default option, and Paypal states that "Paypal will use Visa xxx xxx to fund this transaction if your bank does not have enough funds."

Well it sounds very easy and simple. Paypal doesn't charge you if it has to use "Backup Source" because you don't have enough funds in your primary source. But the catch is your bank will!!! If you don't have enough funds in your debit account, once Paypal tries to withdraw funds from it, the bank will charge you "dishonor fee", which normally is around $30.

So here are a few tips for how to avoid dishonor fee from your bank while using Paypal

  • Make sure the funding source you select has enough funds

  • DO NOT ever rely on Paypal's automatic backup source option. Your bank may end up charging you hefty fees

  • If you accidentally paid and you realize it doesn't have enough funds, transfer money to that account as soon as possible. Go and deposit it personally. Sometimes Paypal doesn't charge straight away. I got away like that once.

  • If you don't have enough funds in default funding source, click "change" and choose another source with enough funds

Paypal - Funding Options

Paypal - Funding Confirmation
Once again, Don't rely on Paypal's automatic backup source option.

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  1. Anonymous // July 01, 2009 12:46 pm  

    hey dude I accidentally selected to pay with bank account then I realized it didn't have enough funds
    but I had my credit card as a backup
    I dont know if my bank will charge me could u give me some deep info

  2. Dan // September 23, 2011 11:02 pm  

    I selected to have funds transfered from bank to paypal, but during the time it takes to make the transaction I closed the bank account. I can't cancel the paypal transaction. Wonder what will happen? Bank says they can not charge a fee because there is no account to charge. I can't see anywhere that paypal will charge a fee. Hopefully it will just be a failed transaction.