An uptick in private equity defaults could squeeze your access to credit. Here's how

When private equity-backed companies stumble, it's not just Wall Street that feels the pain. Everyday Americans could soon find it harder and more expensive to get a mortgage, car loan or small business credit line.

Private equity defaults rose 80% in the second quarter of 2025, with 21 companies defaulting on more than $27 billion of debt, up from 15 companies defaulting on roughly $15 billion of debt in the previous quarter, according to Moody’s Ratings. The spike in PE defaults was driven by a deterioration in credit conditions amid President Trump’s trade wars and tariff policy, Moody’s reported.

If PE defaults continue to stack up, it could heighten concerns about potential ripple effects through the banking system.

While experts aren’t convinced the situation poses an immediate systemic risk, they acknowledge that growing stress in private markets could eventually tighten credit availability for consumers and small businesses.

"Private-equity-owned companies are distributed across the entire economy," said Damien Moore, director of economic research at Moody's Analytics. "When things go wrong in private companies, there are much bigger employment impacts" than at publicly traded firms, he added.

The banking system has substantial exposure to private equity through multiple channels: direct lending, syndicated credit lines, relationships with private equity fund managers and exposure to private credit funds that lend to PE-owned companies.

"There's a multi-tentacle thing that links the banking system to private equity," Moore said.

How PE defaults could hit your wallet

If private equity defaults continue climbing, consumers could face a one-two punch: reduced credit availability and higher borrowing costs.

Banks feeling pressure from private equity defaults would likely "pull in the reins on all forms of lending," including consumer loans, according to Moore. This could mean fewer mortgage lenders advertising competitive rates online, or those enticing zero-percent auto financing offers disappearing entirely.

Credit standards would tighten, and "we could see the pricing spike back up," with interest rates rising substantially, Moore noted.

The mortgage market offers a preview of this dynamic. Major banks have already pulled back significantly from mortgage lending, with independent mortgage banks now dominating originations. If private equity stress intensifies, that pullback could accelerate across all consumer lending products.

"You're going to see less advertising or offers," Moore said of early warning signs. Those promotional emails for personal loans and credit cards could start to vanish.

Unlike public markets where problems surface quickly, private equity troubles can lurk beneath the surface for months due to a lack of transparency around market activity. 

"They may have been in trouble two quarters ago, and we still might not know the depth of the troubles," Moore said, noting it typically takes "on the order of quarters" before private market distress becomes apparent.

This opacity creates challenges for regulators and consumers alike in gauging true risk levels.

Systemic risk or manageable stress?

Sitara Sundar, head of alternative investment strategy and market intelligence for JPMorgan Private Bank, said she believes PE risks are contained — for now.

"We're not concerned that the defaults or the activity that is taking place within the private market space are going to create systemic risk within the economy," Sundar said.

Bank lending to private equity and private credit firms represents only about 5%-15% of total lending to non-bank financial institutions, which is "meaningful, but not detrimental,” Sundar said.

Additionally, Federal Reserve research suggests that even if private credit vehicles withdrew all remaining funds from bank credit lines, the impact on bank capital and liquidity ratios would be minimal.

Private credit remains just 9% of all corporate borrowing despite 14.5% annualized growth over the past decade, Sundar noted. While significant, that's far from the concentrated exposure that triggered the 2008 financial crisis.

Banks today are also better capitalized than before the Great Recession, with improved tier-one capital ratios and liquidity coverage ratios that provide cushion against shocks.

Private equity and your 401(k)

President Trump's executive order allowing private equity in 401(k) plans adds a new wrinkle. While experts say this democratizes access to an asset class previously reserved for wealthy investors and institutions, it also exposes ordinary retirement savers to private equity volatility.

Sundar emphasizes that private equity's typical seven-to-10-year time horizon aligns with retirement investing goals, and stresses the importance of careful manager selection.

"It is going to become increasingly important the manager that you invest in, because not all will get access to the same opportunities,” Sundar said.

However, only 9% of private credit investors are retail participants currently, according to data from JPMorgan Private Bank, meaning most exposure remains institutional for now.

What consumers should watch

For everyday Americans, several warning signs within the private credit market could indicate issues for consumer finance, such as:

• Fewer lenders offering competitive rates on comparison websites.
• Promotional financing offers disappearing or becoming much more expensive.
• Banks tightening underwriting standards across product lines.
• Meaningful increases in small business layoffs or wage cuts.

Moore suggests that consumers ensure their bank accounts remain under FDIC insurance limits — currently $250,000 per depositor, per insured bank — as a basic precaution.

The current environment of financial deregulation and federal staffing cuts at oversight agencies like the Consumer Financial Protection Bureau (CFPB) adds a layer of uncertainty.

If private equity stress does threaten financial stability, the government could pull some regulator levers to ease the strain. For instance, the Federal Reserve could open lending facilities and the Treasury could backstop corporate debt markets as it did during COVID-19.

But as Moore pointed out, the Trump administration's business-friendly approach pits consumer protections against business interests, with the latter usually winning out in the current environment.

"It's probably not going to be good for the consumer, because they'll be left out in the cold,” Moore said.

Private equity hiccups aside, the economy has proven resilient through the bumps this year, so most experts don't anticipate an immediate crisis. But if private equity defaults continue rising, along with persistent tariff uncertainty and elevated valuations, consumers should stay alert to signs of credit tightening.