What Is Private Credit? How Individual Investors Can Access This Asset Class

Private credit refers to loans made by non-bank lenders to businesses, bypassing the traditional banking system entirely. These loans generate interest income for investors, typically yielding 8–12% annually — well above what public bonds or savings accounts offer. Once locked behind institutional gates, private credit now sits within reach of individual investors through a growing number of online platforms.

How Private Credit Works

A company needs capital. Instead of issuing bonds on a public market or walking into a bank, it borrows from a private lender — often a fund or platform that pools money from multiple investors. The borrower pays interest, and that interest flows back to the investors who funded the loan.

The "private" in private credit simply means these loans don't trade on public exchanges. You won't find them quoted on Bloomberg or listed alongside Treasury bonds. This illiquidity is a feature, not a bug: it's a major reason private credit yields more than comparable public debt.

Most private credit deals fall into a few categories:

• Direct lending: Loans made directly to mid-market companies, often with revenues between $10 million and $1 billion.
• Mezzanine debt: Subordinated loans that sit below senior debt but above equity in the capital structure. Higher risk, higher yield.
• Asset-based lending: Loans secured by specific collateral — receivables, inventory, or real estate.
• Specialty finance: Consumer loans, litigation finance, trade finance, and other niche credit strategies.

Private Credit vs Bonds: Key Differences

Investors often compare private credit to bonds, and the differences matter. Public bonds trade daily on exchanges with transparent pricing. Private credit locks your money up for months or years. That illiquidity premium is real — private credit has historically returned 3–5 percentage points more than investment-grade corporate bonds.

Credit risk differs too. Public bond markets have rating agencies (Moody's, S&P) grading every issue. Private credit deals rely on the underwriting judgment of the platform or fund manager. You're trusting their due diligence, not a rating agency's stamp.

Default rates in private credit have hovered around 2–3% historically, though they spike during recessions. Recovery rates tend to be higher than in public high-yield bonds because private lenders often negotiate stronger covenants — contractual protections that give them more control if the borrower stumbles. For a deeper comparison, see our guide to private credit vs bonds.

Why Private Credit Has Grown So Fast

Private credit assets under management have exploded from roughly $500 billion in 2015 to over $2.1 trillion by early 2026. Two forces drove this growth.

First, banks retreated from mid-market lending after the 2008 financial crisis. Regulations like Basel III and Dodd-Frank made small and mid-size business loans more expensive for banks to hold. Private lenders filled that gap.

Second, low interest rates from 2009 to 2022 pushed investors into alternative yield sources. Even after rate hikes in 2022–2024, private credit maintained its spread advantage over public bonds, keeping demand strong.

How Individual Investors Can Access Private Credit

A decade ago, you needed $5 million and a relationship with a fund manager. Today, several platforms have lowered minimums dramatically.

Yieldstreet

Yieldstreet offers private credit exposure across multiple asset classes — real estate loans, marine finance, legal finance, and corporate lending. Minimum investments start at $2,500 for some offerings. The platform is open to both accredited and non-accredited investors for certain products, though most private credit deals require accreditation.

Percent

Percent focuses specifically on private credit, connecting investors with deals in small business lending, consumer finance, and merchant cash advances. Minimums typically start around $500, making it one of the most accessible entry points. Percent provides detailed performance data and borrower-level transparency that's unusual in this space.

Groundfloor

Groundfloor takes a different approach, offering short-term real estate debt investments starting at just $10. These are essentially bridge loans to house flippers and small developers. Terms run 6–18 months with target returns of 8–14%. Groundfloor is open to non-accredited investors, making it the lowest barrier to entry for private credit investing.

What Returns to Expect

Private credit yields vary by risk level and loan type. Here's a rough framework:

| Strategy | Typical Net Yield | Lock-Up Period | |---|---|---| | Senior direct lending | 7–9% | 1–3 years | | Mezzanine/subordinated | 10–15% | 2–5 years | | Real estate bridge loans | 8–12% | 6–18 months | | Specialty finance | 9–14% | 6–36 months |

These are net figures after platform fees but before taxes. Actual results depend on default rates, recovery rates, and the specific underwriting quality of each platform.

Private credit returns have been remarkably consistent. Unlike stocks, which swing 20–30% in a given year, private credit portfolios tend to deliver steady income with low volatility. The tradeoff is illiquidity — you can't sell on a bad day, but you also don't panic-sell on a bad day.

Risks You Should Understand

Private credit is not a savings account. Real risks exist.

Default risk is the obvious one. Borrowers can fail to repay. A well-diversified private credit portfolio might see 2–5% of loans default in a normal year, but a recession could push that higher.

Illiquidity risk means your money is locked up. If you need cash, you can't simply sell your position on an exchange. Some platforms offer secondary markets, but liquidity is thin and you may sell at a discount.

Platform risk is specific to online investing. If a platform shuts down, your investments may be affected even if the underlying loans are performing. Look for platforms that use bankruptcy-remote structures — legal entities that protect investor assets if the platform itself fails.

Interest rate risk works differently here than in bonds. Most private credit carries floating rates, meaning yields adjust upward when rates rise. This was a major advantage during 2022–2024. But if rates fall, your income drops too.

For more on the mechanics, read our private credit explained guide.

How to Build a Private Credit Allocation

Start small. A 5–15% allocation to private credit within a broader portfolio makes sense for most investors seeking income and diversification. Spread your capital across multiple loans and platforms rather than concentrating in a single deal.

Match your time horizon to the lock-up period. Don't invest money you'll need in six months into a three-year loan. Private credit works best as a complement to liquid holdings — stocks, bonds, and cash that you can access immediately.

Reinvest the interest payments if you don't need current income. Compounding at 9–12% builds wealth faster than most people expect. A $10,000 investment compounding at 10% annually becomes $25,937 in ten years.

Frequently Asked Questions

Is private credit a good investment for beginners?

Private credit can work for beginners who understand they're trading liquidity for higher yields. Start with platforms like Groundfloor that allow small minimums ($10) and short lock-ups (6–18 months). Build experience with smaller positions before committing larger amounts to longer-duration deals.

What is the minimum investment for private credit?

Minimums range from $10 on Groundfloor to $2,500 on Yieldstreet, with most platforms falling in the $500–$5,000 range. Institutional private credit funds still require $100,000 or more, but online platforms have made the asset class accessible at much lower thresholds.

How does private credit perform during a recession?

Default rates rise during recessions — historically doubling or tripling from normal levels. However, private credit's stronger covenants and secured structures typically produce better recovery rates than public high-yield bonds. Senior secured private credit has weathered downturns better than equity or subordinated debt.

Do I need to be an accredited investor for private credit?

Not always. Groundfloor and certain Yieldstreet offerings accept non-accredited investors. However, most private credit deals on platforms like Percent require accredited status — meaning $200,000+ annual income or $1 million+ net worth excluding your primary residence.

How is private credit income taxed?

Interest income from private credit is taxed as ordinary income at your marginal federal tax rate, just like bank interest or bond coupons. This makes private credit particularly attractive inside tax-advantaged accounts like IRAs or 401(k)s, where you can defer or eliminate the tax hit.

What's the difference between private credit and private equity?

Private credit means lending money and earning interest. Private equity means buying ownership stakes in companies and profiting from growth or sale. Private credit offers more predictable returns with less upside, while private equity swings wider in both directions. They serve different roles in a portfolio.

ModernAlts is an independent research platform. Nothing in this article constitutes investment, legal, or tax advice. Alternative investments involve risk including possible loss of principal.