What rising private credit defaults could mean for your money

Every so often, there’s a story in the financial world that sounds very technical but quietly affects a lot of regular people. What’s happening right now in “private credit” is one of those stories.

Defaults are rising, more loans are being kept alive with creative accounting, and a big chunk of this debt is coming due soon. You don’t need to become a credit analyst, but understanding the basics can help you be a smarter investor and protect your own money.

What is private credit, in plain English?

When companies need to borrow money, they have a few options. The traditional route is to go to a bank or issue bonds in public markets. Private credit is different: it’s money lent by private funds and business development companies (BDCs) directly to companies, usually smaller or mid-sized ones.

These loans are often:

• Not traded on public markets
• Less transparent to everyday investors
• Higher interest, because they’re riskier
• Frequently used by private equity–owned companies

In other words, private credit is a big, mostly behind-the-scenes lending market. And right now, that market is showing stress.

Defaults are rising to record levels

According to recent data from Fitch, a major credit rating agency, the trailing 12‑month default rate in US private credit has climbed to about 6.3%, the highest level since they started tracking this data a couple of years ago.

That rate has been ticking up steadily:

• End of Q1: 5.7%
• End of June: 6.0%
• End of July: 6.1%
• August: 6.3%, with a spike in default events

In August alone, Fitch recorded 14 default events, compared with just 3 in July. Most of those were first‑time defaults, not repeat offenders.

Even more worrying: a lot of this debt has floating interest rates. That means when interest rates go up, the cost of borrowing rises automatically. For a company already struggling to make payments, even a small rate hike can be the straw that breaks the camel’s back.

How rising rates make things worse

Imagine a company with $500 million of floating‑rate debt. A 0.25 percentage point (25 basis point) increase in rates means roughly an extra $1.25 million per year in interest costs.

If that company is already having trouble paying today’s interest bill, every rate hike makes the problem bigger. Multiply that across hundreds of companies in private credit portfolios, and you can see why default rates are creeping up.

The “life support” tactics: PIK and maturity extensions

Here’s where things get tricky. Many of these struggling companies aren’t officially missing payments and going straight into bankruptcy. Instead, lenders are using tools that keep the loans technically alive, even when the company can’t really afford them.

Payment-in-kind (PIK) interest

PIK stands for “payment in kind.” Instead of paying interest in cash, the borrower is allowed to add the interest to the loan balance.

So instead of:

• Paying $10 million of interest this year in cash

The company does this:

• Adds $10 million to the principal balance and pays nothing in cash

The loan gets bigger, while the company’s revenue is often flat or declining. It’s like putting your credit card interest back onto the card every month and never paying it down — the balance keeps growing, even if your income doesn’t.

Researchers at the Boston Fed found that PIK usage in BDC loans has risen from about 6% in early 2022 to nearly 10% by early 2026. That’s a big jump in a short time.

Stressed maturity extensions

Another tool lenders are using is the “stressed maturity extension.” Normally, when a loan reaches its maturity date, the company either:

• Pays it off, or
• Refinances it with a new loan

But when a company can’t do either, lenders are increasingly saying, “Okay, we’ll just push the maturity date out further instead of calling this a default or forcing bankruptcy.”

Over the last year, a large share of default events in private credit involved:

• Interest deferrals or replacing cash interest with PIK (about half of cases)
• Stressed maturity extensions (around 40% of cases)
• Very few uncured payment failures or bankruptcies

In August alone, about 45% of defaults were these stressed maturity extensions. That means the loan is in trouble, but the lender is choosing to roll the problem into the future rather than recognize a full-blown loss today.

Why some default numbers look lower than others

If you look at different reports on private credit, you’ll sometimes see very different default rates. For example, one private credit index showed defaults around 2.5% in a recent quarter, while Fitch’s broader measure was closer to 6% for a similar period.

The main difference is how they define “default.”

Some measures count only the most obvious failures: missed payments that aren’t fixed, bankruptcies, or hard restructurings. Fitch takes a broader view and includes:

• PIK conversions (when cash interest is swapped for payment‑in‑kind)
• Interest deferrals
• Stressed maturity extensions

From a practical standpoint, if a company can’t pay its interest in cash, has to keep extending its loan, and is piling debt on top of debt, that’s financial distress — whatever label you put on it.

The $250+ billion “maturity wall” coming up

One of the biggest concerns is what’s called the “maturity wall” — a large amount of debt all coming due in a relatively short timeframe.

Estimates suggest that roughly $260 billion of US middle‑market BDC debt is maturing in the next 36 months. That means:

• Hundreds of companies will need to refinance or repay their loans
• They’ll likely face higher interest rates than when they originally borrowed
• Many will be trying to refinance while earnings are already under pressure

If lenders keep extending maturities and allowing PIK, the problem gets pushed out. But at some point, either:

• Companies need to refinance at much higher costs, or
• Lenders stop extending, and we see more outright defaults and bankruptcies

Which companies are struggling the most?

This stress is not mainly about giant, well-known public companies. It’s mostly hitting smaller, leveraged, middle‑market firms — often owned by private equity and financed by private credit funds.

Fitch’s data shows:

• Companies with less than $25 million of EBITDA (a rough cash‑flow measure) have default rates around 12% — nearly double the overall index
• For companies with $26–50 million of EBITDA, defaults jumped significantly in just one month

Two sectors stand out as especially stressed:

• Healthcare: default rates rising from around 6.9% to 9.9% in a year
• Industrial manufacturing: roughly doubling from about 5.2% to 9.9% in a year

These are not tiny, niche parts of the economy. They touch jobs, local communities, and supply chains.

Why this matters to regular people

You might be thinking, “Okay, but I don’t own a private credit fund. Why should I care?” This matters in a few ways:

1. Your investments may have exposure. Even if you don’t invest directly in private credit, your retirement accounts or mutual funds may hold shares of BDCs, private equity firms, or asset managers that are heavily involved in this space.

2. Stress can spill over into public markets. If defaults climb and lenders are forced to recognize losses, that can pressure stock prices, bond markets, and investor confidence more broadly.

3. Jobs and local economies can be affected. Many of these middle‑market companies employ people in healthcare, manufacturing, and other core industries. Financial stress at the company level can translate into layoffs, slower hiring, or reduced investment.

4. It’s a reminder about leverage and risk. When times are good, borrowing a lot can look smart. When conditions change — higher rates, slower growth — that leverage can become a serious vulnerability. The same lesson applies at the household level.

What you can do to protect yourself

You can’t control what private credit lenders or the Fed do next, but you can make your own finances more resilient. Here are some practical steps:

1. Be cautious with high-yield, complex investments

If you’re tempted by investments promising high yields from private credit, BDCs, or complex income products, slow down and read the fine print. Ask:

• What exactly am I lending against?
• How are defaults defined and reported?
• How did this fund perform in past periods of stress?

High yields are almost always compensation for higher risk. Make sure that risk fits your goals and timeline.

2. Strengthen your own balance sheet

The same forces hurting these companies — higher interest costs and heavy debt loads — can hurt households too. This is a good time to:

• Pay down high‑interest debt where you can
• Build or top up your emergency fund
• Avoid taking on new variable‑rate debt if possible

If you’re working on paying off debt, you may find it helpful to pair big‑picture awareness like this with practical, everyday strategies. I walk through some of those in this guide on what actually helps with debt.

3. Keep your investing simple and diversified

Periods of financial stress are when a boring, diversified investing plan really shines. Instead of chasing the latest "alternative" opportunity, consider:

• Broad, low‑cost index funds
• A mix of stocks and bonds that fits your risk tolerance
• A long‑term focus instead of reacting to every scary headline

If you like adding a little creativity to how you manage and grow your money (without overcomplicating things), you might enjoy these creative but grounded money habits.

4. Watch your time horizon

If you’re investing money you’ll need in the next 1–3 years — for a home down payment, tuition, or a major life event — this is not the place to take on credit risk. Keep short‑term money in safer, more liquid options, even if the yield is lower.

The bottom line

Private credit defaults are rising, and a growing share of loans are being propped up by interest deferrals, PIK arrangements, and maturity extensions. On paper, that can make things look calmer than they really are, but underneath, many borrowers are struggling.

You don’t need to predict exactly how this will play out. The takeaway for most of us is simpler: keep your own finances flexible, avoid over‑leveraging yourself, be cautious with complex high‑yield investments, and stick to a clear, long‑term plan. That way, even if this “debt wall” gets messy, your personal financial foundation stays solid.