Financing, mortgages and money lending in Costa Rica.
Private money lending in Costa Rica, is an investment option. As a civil attorney and notary public, I am an expert in all fields regarding money loans, their legal implications, and risk assessment. Our firm can assist you with your financing and money-lending endeavors in Costa Rica. From legal advice, risk assessment, and loan-notarized structures to debt collection litigation. Costa Rica offers a secure legal environment for home financing and loan investments. Interest rates in the market vary, depending on the type of loan, the given guarantees, risk assessment, and legal factors. In Costa Rica, creditors lend at interest rates ranging from 7% to 11%, with mortgage loans in dollars. Interest rates can reach up to 40% per annum with personal loans.
However, interest rates will vary, especially since the arrival of the usury legislature. The newly established Usury Laws limit the amount of interest any creditor can expect. To minimize risk, assessing the securities involved in money lending is essential. Mortgages and liens are known as “royalty” rights and are ways to secure your loan. Money lending can take the form of mortgage loans to assist buyers with their real estate property purchases. You can expect a higher return rate with car lending and personal loans, but a higher return involves higher risk.
How can you assess the debtor´s personal risk when financing in Costa Rica?
Private money lending in Costa Rica is all about risk assessment. The first step is to assess the debtor himself. Research must be performed with the different loan bureaus to see if he has failed to comply with loan payments. His loan history provides a clue as to whether or not he behaves responsibly. This is a sort of “debtor due diligence”. The credit bureaus will inform of any judicial procedures due to loan agreement breaches. But that is not enough. It´s also essential to request proper proof of income, such as statements from Costa Rican banks and other information to determine the debtor´s credit score.
What other sorts of due diligence should be performed for risk assesment?
After you determine if the prospective debtor´s credit score, it´s essential to perform other types of financial due diligence. For home financing, you will want to perform real estate due diligence. You will want to have the legal due diligence performed by our legal team, to assess any legal issues with the home in Costa Rica, that you wish to finance. Going to see the actual house, or property, is also essential, in order to spot any issues with the property itself.
Can you provide details on the different guarantees used for private money lending in Costa Rica?
You have several financing options if you wish to do private money lending in Costa Rica. The debtor can secure the loan with Personal or “Real” Guarantees. Personal guarantees are those where no individual asset is used to guarantee the loan. All of the debtor´s patrimony is the guarantee. Usually, personal loan agreements are guaranteed with promissory notes or letters of exchange.
On the contrary, Real Guarantees are those that are guaranteed by a particular asset, such as a home in Costa Rica, a private real estate property, or a vehicle. Real estate and home financing use mortgages, while mobile assets such as cars use a lien, or “prenda” in Spanish.
What is money lending with a mortgage guarantee. What is a mobile loan?
Both mortgages and liens are rights over somebody else´s ownership of real property. Allow me to explain. A person can own real estate property and mortgage it to a money lender through a loan structure. As a notary public, I will register the mortgage, which becomes an “encumbrance” over the asset. The same example applies to car loans, guaranteed with vehicle liens. As a creditor, you get a right over the debtor´s ownership rights – be it a mortgage (for properties) or a lien (for cars.). In re aliena is Latin and translates to “a right in someone else´s property.
The statute of limitations of both rights is different. However, the main difference is that mortgages can be placed over real rights regarding immobility assets. Houses, land, real estate properties, and usufruct rights can all be mortgaged. Liens, on the other hand, are placed over real mobility rights. A mobile asset can be moved from location to location without losing its essence. Mobility loans fall on vehicles, boats, and animals because they are mobile assets. It´s pretty standard in Costa Rica to guarantee loans with cars. Therefore, a lien is an encumbrance on the vehicle to secure the loan. To conclude, a mortgage is to a property what a lien is to a vehicle or mobility asset.
Can you give a definition of a mortgage, liens, and the statute of limitations?
A mortgage is a loan structure guaranteed by a real right, such as a property. The real estate property remains in the debtor’s name except if it´s transfered to a mortgage trust. A lien works in the same way. First, the date is set for the principal loan amount to be paid entirely. This is the loan maturity date. Next, simple and moratory interest is also established. Once the maturity date happens, the creditor has ten years to execute the mortgage loan and four years for vehicle liens upon the loan’s maturity. If he doesn´t, the statute of limitations may occur. The law of limitations is the time frame the creditor has to execute his rights as the creditor.
Types of mortgages and liens in Costa Rica
What is a simple mortgage and a common lien?
A standard mortgage and lien (prenda) are both unilateral loan contracts. Therefore, they must be constituted in a public scripture by a notary public and then registered in the Public Registry.
What is a mortgage bond?
A mortgage bond is a curious form of a mortgage. A real estate property is encumbered with the mortgage to guarantee a loan obligation. However, there is no debtor, just bonds guaranteed with a property. The only right in this type of loan is against the property, as established in the bond. The bonds are transmitted by endorsement, as per the rules of title bonds.
What are "Legal Mortgages"?
They are created by law for specific debts. The owner´s consent is unnecessary, as these types of mortgages arise when the situation specified by law manifests itself. A few legal mortgages are the HOA quotas, the ones established by territorial taxes and water works. If the owner does not pay, these specific debts will have a privileged position for debt collecting. The property will be auctioned.
How are property mortgages and vehicle liens registered in Costa Rica?
Property mortgages and vehicle liens must be constituted in a public scripture by a notary public. Due diligence must be performed on the assets to serve as guarantees. It´s essential to establish who the owner is and, most notably, if there are any pre-existing encumbrances on them. Once the notarized document is filed at the Registry and duly registered, the lien or mortgage will appear in the assets as encumbrances.
Can guarantees be used in a money lending trust structure?
Yes. If done correctly, trusts (known as fideicomisos in Spanish) can be a valuable tool for credits and loans. A Guaranty Trust can be established, but I can only recommend these structures for mortgage trusts. There is a reason for this. If you wish to execute a guaranty trust for a mortgaged property, you will have no problem. It will be an extremely expedited procedure. However, the problem will arise with vehicle liens in a trust. When you execute the trust privately, you are excluding the figure of the civil judge. In a pure judicial execution, the judge orders the vehicle used as the guarantee to be captured by police. In a private trust, you will have no order to capture the car. To conclude, property guaranty trusts work fine in Costa Rica. However, I can´t recommend the use of trusts for liens.
What are the statutes of limitations for private money lending in Costa Rica?
Most loans in Costa Rica are commercial, and thus, civil law does not apply. By principle, all commercial loans have a statute of limitations of four years. For example, if you signed a promissory note, the creditor has four years (after the deadline) to file the lawsuit and serve you. If the fatal time-lapse passes, that statute of limitations on the principal occurs. However, mortgages are different and have a statute of limitations of ten years that begin when the payment deadline passes. It´s worth noting that the statute of limitations on interest has a smaller time frame of just one year.
Dr. Christopher Pirie Gil.