Written

For

The

Australian

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Private

credit

boom

hides

dangerous

investment

traps

Would you swap a government-guaranteed 5% term deposit for an unsecured 10% private credit loan to a struggling start-up? Judging by the flood of money pouring into private credit right now, plenty of Australians are doing exactly that — and I'm not sure they realise what they're signing up for.

With the RBA now cutting rates and term deposits sliding from 5.5% toward 4% by year-end, retirees are feeling the pinch. It's completely understandable that many are looking for alternatives to preserve their income. Private credit — essentially loans made by non-bank operators to businesses or property developers — has become the go-to answer. Investors typically pocket 8% while the operator clips 2% off a 10% loan.

Sounds neat. But here's what worries me.

Private credit isn't covered by the government's $250,000 deposit guarantee. The recent $1.2bn Shield Master Fund collapse is a sobering reminder — investors in the "conservative" option are tipped to get back just 50c in the dollar.

Even as a professional adviser, I find it genuinely difficult to compare private credit funds at a glance. The glossy websites all look similar. It's only when you wade through 200-page product disclosure statements that the risk differences become clear. One fund might lend at 50% LVR against property with a first-registered mortgage and prepaid interest. Another might be handing unsecured cash to start-ups desperate for liquidity. Same "private credit" label, wildly different risk.

A few other things I'd check before investing: is it a retail or wholesale fund (retail has more oversight and CSLR access), are returns fixed or variable, and does the operator use an independent custodian or handle your cash directly?

Chasing an extra few percent of yield is tempting. But swapping risk-free for risky without understanding what's under the bonnet is how retirement plans get derailed.