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War. Oil. Artificial intelligence. You don’t need a finance degree to get why headlines around these things matter for your budget, your job, or your investments.

But there’s another term popping up that most people don’t instinctively understand: It’s the “private credit” industry, and it’s showing signs of strain that could hurt other areas of the financial system and the economy broadly.

Here’s a quick take on what it is and what the concerns are.

Private credit defined

Private credit is a fast-growing part of the financial system where investment funds, rather than banks, make loans to private businesses that may have fewer traditional financing options. Think of these funds like private equity funds, but instead of buying the companies, they lend money to them.

The concern is that more of their borrowers are under pressure, and because the market is private, it’s hard to see what’s going on under the hood. That can make problems slower to surface and easier to underestimate.

The red flags

Last year the bankruptcies of two companies tied to subprime auto lending and auto parts sparked questions about whether private credit players are doing enough due diligence in their loan underwriting. At the same time, there’s a growing unease about how concentrated many private-credit portfolios are in the software sector, which is increasingly vulnerable to the rapid advances in AI.

The data is starting to back up the concerns. The U.S. private-credit default rate hit a new high of 9.2% last year, up from 8.1% in 2024, Fitch Ratings said earlier this month. And more borrowers are under strain: By the end of 2024, roughly 40% of companies financed by private credit had negative free cash flow — meaning they were spending more than they were bringing in, according to the International Monetary Fund. That’s up from 25% in 2021.

More investors want out

Some investors in private-credit funds are already spooked, looking to cash out in unusually high numbers, and in some cases, pushing fund managers to limit withdrawals. BlackRock’s $26 billion HPS Corporate Lending Fund, for example, had withdrawal requests exceeding its 5% quarterly cap this quarter, marking a first since its inception four years ago.

But a bigger concern is how these credit cracks could affect the broader financial ecosystem as the overlap between private credit and traditional financial services grows. Bank lending commitments to private-credit funds increased almost 12-fold to roughly $95 billion between 2013 and 2024, according to Federal Reserve research. And some of the biggest investors in private credit funds are insurers and pension funds, which often seek out these investments for their higher yields and steady income.

The overlap has even caught the attention of policymakers in Washington. Treasury Secretary Scott Bessent recently said he’s “concerned” and watching the sector closely.

“Our job is to make sure that the regulated system is not affected by private credit,” he told the Economic Club of Dallas.

So what?

You don’t have to invest in a private-credit fund for it to affect you. Its explosive growth since the 2008 subprime mortgage crisis means it’s no longer a niche corner of finance. It’s intertwined with the broader financial system — from banks that lend to these funds to insurers and pension funds that invest in them. And private credit finances thousands of midsize companies that employ millions of workers.

In other words, if these companies can’t pay back their loans, the stress may not stay contained. Jamie Dimon, the CEO of JPMorgan Chase, has even drawn parallels to 2008, warning that private credit could become a “recipe for a financial crisis.”

These funds may have to scramble if too many investors pull out at once. Think of it like money that looks available on paper but isn’t fully in cash. That works in calm markets, but when there’s pressure, it can amplify problems — not just for investors, but for the companies relying on that funding and the broader economy.

The takeaway isn’t to be alarmed, but to pay attention. What happens in this largely hidden corner of finance may not stay there.

Related Reading

Pimco Sees Crisis of ‘Bad Underwriting’ in Private Credit (Yahoo Finance)

Understanding Financial Contagion: Spread of Economic Crises (Investopedia)

The Promises and Perils of Private Credit (Duke Law)

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