Private credit and peer-to-peer lending

Private credit refers to loans made by non-bank investors — directly to companies or individuals — that don't trade on public markets. For individual investors, this mainly shows up as peer-to-peer lending platforms (like Prosper or LendingClub, the latter of which stopped P2P) or private credit funds available through brokerages. The pitch: higher yields than bonds. The reality: higher yields with meaningfully higher risk and much less liquidity.

How peer-to-peer lending works

A platform connects individual borrowers (usually for personal loans) with individual lenders (you). You fund a fraction of many loans, earning interest on each. Returns of 5–10% are typical for diversified portfolios of loans. But default rates are real — 3–8% of loans may default depending on the credit tier, and a recession can spike that number dramatically.

Private credit funds

More sophisticated investors can access private credit through interval funds, BDCs (business development companies), or private credit ETFs. These lend to mid-sized companies at higher rates than public bonds. The yield premium is real — but so are the risks: illiquidity, credit concentration, and the possibility of significant losses in an economic downturn when the companies you lent to struggle to repay.

Who this is for

• Investors who have maxed their tax-advantaged accounts and have a fully diversified stock/bond portfolio already.
• People seeking yield who understand that higher yield = higher risk, always.
• Investors with a long time horizon and tolerance for illiquidity.
• NOT for emergency funds, NOT for short-term goals, NOT for anyone who might need the money back on short notice.

The market, sized

The vehicles compared

A worked example: what defaults do to the headline yield

Say you spread $20,000 across 400 P2P notes yielding a headline 11%. In a decent year, 4% of borrowers default with little recovery: your gross 11% becomes roughly 7% after charge-offs, then about 6% after the platform's 1% servicing fee — respectable, similar to what high-yield bonds paid with daily liquidity. Now run a recession: defaults jump to 10%, and your return goes negative just as your stocks are also down and your notes cannot be sold. That is the structural catch across all private credit — the asset class earns its premium partly for illiquidity, and illiquidity bites hardest at precisely the moment everything else in your life is screaming for cash. The 2008-2009 vintage of consumer P2P loans and the 2020 gating of several interval funds are the historical receipts.

The institutional version has a subtler issue: valuation smoothing. Private loans are marked by models, not markets, so private credit funds report eerily steady values while public bonds gyrate. That smoothness is cosmetic — the underlying borrowers face the same economy — and part of the appeal of the asset class is, bluntly, that investors enjoy not being told their assets fell. Discount the calm; judge the credit.

If you proceed anyway: the checklist

• Cap the whole category at 5-10% of investable assets, funded only after tax-advantaged accounts are maxed and the emergency fund is full.
• Read the redemption terms twice: quarterly windows, gates, and lockups are features of the structure, not fine print to skim.
• Compare net-of-fee, net-of-default returns to boring alternatives — in 2025-2026, Treasuries at 4-5% and investment-grade bonds set a high bar for taking illiquid credit risk.
• Prefer diversified vehicles with long records across a full credit cycle over new funds born entirely inside a benign economy.
• Check what seniority you actually hold — senior secured loans and subordinated notes can hide under the same 'private credit' label with very different loss behavior.

The honest summary: private credit is a legitimate institutional asset class that arrives at retail with the yields compressed, the fees intact, and the liquidity removed. For a sophisticated investor with genuine five-year money, a modest allocation to a seasoned BDC or interval fund is defensible. For everyone else, the extra 2-3% over a bond index is buying a set of risks — gates, marks, defaults, platform failure — that only reveal their price at the worst possible time.

It is also worth naming the macro backdrop, because it explains the marketing you are seeing. Private credit boomed after 2010 as banks retreated from middle-market lending, and the fundraising machine now needs retail investors precisely because institutions are approaching their allocation limits. New ETFs, lowered minimums, and glossy podcast sponsorships are distribution strategy, not evidence the opportunity got better — if anything, more capital chasing the same borrowers has compressed spreads and loosened covenants, which is how credit cycles always mature. None of this makes the asset class illegitimate. It does mean the retail investor arriving in 2025-2026 is boarding late in the voyage, and should size the position — and their expectations — accordingly.

A closing sanity check before any purchase: ask what, specifically, this position does that your existing bonds do not, and whether the answer survives the fee stack and a recession. If the honest reply is 'yields two points more, locked up for years, marked by models, and untested through a full default cycle' — you have described the trade accurately, and you can now size it like the speculation it partially is rather than the bond substitute it is marketed as.