Buy Now, Pay Later vs. Personal Loan: What's a Better Option This Holiday Season?

The holiday shopping season is now in full swing. And this year, consumers expect to spend an average of $875 apiece on holiday gifts and seasonal purchases, according to the National Retail Federation.

If you're not sure how you're going to pay for your holiday purchases, then you may be looking to finance them. And in that regard, you have options. You could charge your purchases on a credit card. But going that route might end up costing you a lot of money in interest.

As such, you may be interested in a more cost-effective way to pay for holiday purchases. And you may decide that both a personal loan and a "buy now, pay later" plan, or BNPL plan, might fit the bill. Both of these options, however, have their share of benefits and drawbacks.

Is a personal loan your best bet?

The nice thing about personal loans is that they allow you to borrow money for any purpose. And they also tend to offer competitive interest rates -- much lower rates than credit cards commonly charge. You're especially likely to snag an attractive rate on a personal loan if you have a great credit score.

Plus, with a personal loan, you get the benefit of fixed monthly payments. That can make your debt easier to manage.

But still, any time you take on debt, you run the risk of falling behind on payments and damaging your credit in the process. So that's a risk that exists when you turn to a personal loan as a financing option.

Also, personal loans take time and effort to originate. As such, lenders tend to impose borrowing minimums. If you're only expecting to spend about $875 on holiday purchases like the average consumer, then you may not be borrowing enough to qualify to take out a personal loan.

What about BNPL plans?

The nice thing about BNPL plans is that if you stick to your payment schedule, you can avoid having to pay any amount of interest on your purchases. With a personal loan, you're signing up to pay interest either way. Plus, with a BNPL plan, you'll get a predictable payment schedule to stick to.

BNPL plans can also be pretty easy to put into place, as you're usually approved on the spot. With a personal loan, it can take a few days to get your loan proceeds after you apply (though in some cases, the process can move more quickly than that).

But falling behind on a BNPL plan could mean accruing interest and penalties on the sum you've borrowed. Plus, you'll risk credit score damage -- though to be fair, that same risk exists for falling behind on personal loan payments.

What's your best choice?

If you're not sure whether to turn to a personal loan versus a BNPL plan for your holiday purchases this year, the answer is, you should ideally avoid both. It's one thing to borrow money for an essential purchase or need, like a fridge or washing machine. It's another thing to rack up debt in the course of buying gifts and decorations.

If you can't afford those purchases, your best option really is to scale back and stick to a spending limit you can cover in full. Racking up any sort of holiday debt could put you in a bad financial position heading into the new year. So if you're at the point where you're seriously considering borrowing money for holiday purchases, you may want to reset some spending priorities and find ways to make the most of the funds you have.