Borrowing Money in Costa Rica: Safety & Options

Costa Rica has a wide variety of banks. However, doing traditional loans with banks offer high-interest rates and appalling approval times – it can take up to months to complete conventional bank loans, and that’s even if you get approved by them.

Anywhere in the world, there are several ways of borrowing money – in the loan business, we have types such as “secured” and “unsecured” loans. A secured loan is an equity or a mortgage loan, where collateral and liens are essential to these types of loans, whereas unsecured loans are less dependent on security. An unsecured loan is a monetary loan where the borrower’s assets/benefits aren’t at risk. Unsecured loans are most commonly used for peer-to-peer lending, credit facilities or lines of credit, bank overdrafts, personal loans, credit card debt, as well as all of the above and then some.

Borrowing money in any country can be a tricky and stressful process, especially when you are not familiar with the local regulations, laws, and financial institutions. If you consider borrowing money in Costa Rica, you might wonder if it is safe. This article will answer this question and provide a comprehensive guide to help you make an informed decision.

Is it safe to borrow money in Costa Rica?

Requirements for Foreigners

Costa Rica is a popular destination for foreigners looking to purchase property, but the financing process can be complicated. Specific requirements must be met to obtain financing from a bank in Costa Rica as a foreigner. These include providing proof of a steady source of income, a good credit history, a minimum down payment of 20-60% of the total purchase price, and more. Additionally, you may need to be a permanent resident already and have a local co-signer to allow you to be approved for many, if not most, conventional loans.

Is it safe to borrow money in Costa Rica?

Requirements for a private loan or hard money are typically the opposite, being very easy to qualify for, with the only fundamental requisite having equity as collateral. Many private lenders, such as Gap Equity Loans, do not need their clients to provide a co-signer, proof of income, or show their credit history.

Is it safe to borrow money in Costa Rica?

The State of the Financial System in Costa Rica

Costa Rica has a stable financial system regulated by the Central Bank of Costa Rica (BCCR). The BCCR supervises all banks operating in the country and ensures they comply with the regulations protecting customers and their deposits. The BCCR also has a deposit insurance program that guarantees deposits up to a certain amount in case a bank fails.

Additionally, the BCCR is responsible for maintaining price stability, promoting financial stability, and facilitating the payment system. All these measures ensure that the financial system in Costa Rica is safe for customers and the economy as a whole.

Types of Loans Available

1. Conventional Loans

These loans are provided by traditional financial institutions such as banks and credit unions. They generally have interest rates higher than you’d expect to see in the USA and longer repayment terms than other loan options, but they can feel impossible to qualify for. Possibly the worst part of the process is you could be strung along for over a year or more of waiting just to be denied the loan based on your credentials.

2. Private Loans

These loans are provided by individuals or non-traditional financial institutions and can be more flexible with their terms than conventional loans. People usually assume they have higher interest rates and shorter repayment terms, but in Costa Rica, they can be pretty similar to what the banks would give you.

3. Hard Money Loans

These are secured by the property being purchased through the form of a lean. Investors often use them, which are generally faster and easier to obtain than other loan options because the collateral makes the lender feel secure. However, they also come with great interest rates compared to the banks, especially when the LTV (loan to value) is low. For example, if you are trying to borrow $100,000 USD on a $1,000,000 USD property, it’s possible to see lower interest rates since the LTV is 10%.

How to Choose the Right Loan

Choosing the right loan for your needs as a foreigner in Costa Rica can be a complex process. Here are a few things to consider when making your decision:

• Purpose of the Loan: Are you purchasing a primary residence or an investment property? Your loan needs will be different depending on the purpose of the property.
• Repayment Terms: What are the repayment terms for the loan? Are you comfortable with the length of time you will have to repay the loan and the interest rate being offered?
• Down Payment: How much of a down payment can you make? The more you can put down, the more favorable the loan terms will be.
• Credit Score: What is your Costa Rican credit score, and does it meet the requirements of the loan options available to you?
• Co-Signer: Do you have a local co-signer who can support your loan application and is willing to trust you with their credit score?

Understanding the Real Estate Market in Costa Rica

Before we dive into the various financing options available in Costa Rica, it’s important to understand the real estate market in the country. Costa Rica has a robust and stable economy driven by tourism, agriculture, and a growing tech industry. This has resulted in a strong real estate market that continues to grow and evolve.

In recent years, there has been a surge in demand for beach properties in Costa Rica, particularly from foreign investors. This has led to an increase in the number of available private financing options for those looking to invest in real estate in the country. A private mortgage loan could help you finance your property in Costa Rica, whether you’re a seasoned investor or a first-time buyer.

What to avoid

We want you to choose the right path, but spotting the wrong path is also a vital skill to possess, leaving more room for you to keep borrowing money safely here in Costa Rica. So here are 4 things to be aware of when borrowing money in Costa Rica:

1. Predatory lending

It’s when granting a loan purposefully puts the borrower in a precarious financial position, leaving them in a position to be taken advantage of by the lender. This often happens in “unsecured” or “under the table” Loans.

2. Usury

Usury is when the lender charges immensely high-interest rates. Usury is ubiquitous for secured and unsecured loans, yet it is most commonly found when dealing with loan sharks. Some credit card companies in a few countries have been accused of usury – for example, some banks maintain an interest rate of up to 70% on their credit cards! Keep this in mind when doing a loan to ensure you are not being taken advantage of!

3. Hidden fees

What are hidden fees? It’s when legal and processing fees become outrageous due to overzealous lawyers and lenders. Some shady companies and lenders add hidden costs to the contract. 

4. Over-securitization

What is the over-securitization of a loan? It’s when overzealous lawyers and lenders want to put a lien on more properties than needed for the amount.

Over-securitization of a loan often happens, contrary to the borrower’s benefit. For example, a 10% LTV (Loan-to-Value) loan, such as a $50,000 USD loan on a $500,000 home, should be enough to put a mortgage lien on the home and generally should not require tying up other assets.

Conclusions

Is it safe to borrow money in Costa Rica? Absolutely. Purchasing property in Costa Rica as a foreigner is also possible with the right financing. However, be cautious and stay vigilant for red flags. Use the above tips as a rail guard! Dealing with reputable companies in Costa Rica is essential for a fair loan – look for the right company with the proper credentials. Companies like Gap Equity Loans have your best interest in mind for both the borrowers and the lenders alike! By following these guidelines, you can ensure a safe and stress-free borrowing experience in Costa Rica. With the right loan, you can start living the dream of owning property in this beautiful country.

“I’m not usually one to trust “too good to be true” deals, but gap equity loans have exceeded my expectations. Their team made the process seamless and I couldn’t be happier with the outcome. Highly recommend!” – Tom

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-Co-written by Lawsen Parker (Operations Manager) and Glenn Tellier (Founder of Grupo Gap)

info@gap.cr