Why Lending Money to Friends and Family Is a Bad Idea

It usually starts well. Somebody you like needs money — a business, a build, a gap between a sale and a purchase — and you have it sitting there earning very little. You trust them, so the paperwork feels insulting. A number is agreed over dinner, perhaps a date, and the money moves.

What happens next is well documented, and it is not mainly about dishonesty.

Nobody agreed what they thought they agreed

Without a written instrument there are two versions of the arrangement, and both parties are certain of theirs. Was it interest-bearing or a favour? Was the date a deadline or an aspiration? Is a partial payment progress or default? Neither of you was lying. You simply never had the conversation that a document forces you to have.

There is nothing behind it

The lender in an informal loan is unsecured, whatever was said. If the borrower cannot pay, there is no property to look to — only a claim against a person you care about. That is precisely when people discover that they will not enforce it, which means the loan was never really a loan.

Repayment is last in the queue

A bank gets paid because there are consequences. A brother-in-law gets paid when everything else is covered, because there are none. This is human and predictable, and it is why informal loans stretch from months into years while both sides quietly re-tell the story to themselves.

The relationship pays the difference

This is the real cost. Every family gathering now has a subject nobody raises. The money may or may not come back; the ease between you generally does not. People who have been through it will tell you they would rather have lost the money cleanly.

The same instinct, done properly

Here is the thing worth noticing: the impulse behind lending to a friend is sound. You would rather your capital did something useful for a real person than sit in an account. That instinct is exactly what private lending is — it just adds the parts that protect both of you.

A property-backed loan in Costa Rica has the elements the kitchen-table version lacks. A written instrument stating rate, term and what happens if payments stop. A mortgage registered against real property. A borrower who is a counterparty rather than a relative. Nobody has to be embarrassed at Christmas, because nobody is owed a favour — there is simply an agreement with a date on it.

What that looks like in practice

Terms run 9% to 16% over six months to three years, from $50,000 upward with no ceiling. The loan is written comfortably below what the property would realistically sell for, and that gap is the cushion that makes it work.

The borrowers are frequently people who would otherwise be asking a friend. A foreigner living in Costa Rica generally cannot borrow from a bank until they hold permanent residency — a minimum of four years off for a recent arrival, because without it there is no account of the kind the system runs on and no local credit record. Owning a house outright does not change that. So capable, solvent people end up looking for private capital, and the ones who find a proper structure are better off than the ones who lean on family.

None of this makes the money certain. Borrowers can fall behind and lending against property carries risk. What it removes is the ambiguity — and the relationship.

Who does this

Anyone with capital to place can lend against Costa Rican property, from anywhere. No residency, no need to live here, no need to visit — lenders in Canada, the United States and Europe fund files without ever seeing the property. Many arrived at it holding the proceeds of a house sale back home, wanting that money to work without turning into a job.

GAP does the file work: title pulled and read, liens searched, the property valued honestly, loan to value set, documents drawn, mortgage registered. Everything up to and through the closing is ours, and we stay reachable after it. From then on the borrower pays you directly. See how lending works in Costa Rica.

Questions

Is there any safe way to lend to family?

Write it down, and secure it against something. If the borrower objects to documenting a loan, that is information rather than an insult.

What if I have already made an informal loan?

It can sometimes be formalised after the fact, with the borrower’s cooperation and something to secure it against. Worth asking about while the relationship is still comfortable.

Do I need residency to lend in Costa Rica?

No, and you do not need to be in the country. There is no residency requirement for lending here at all.

What if a borrower stops paying?

The mortgage on the register is the security and the lender can move to foreclose. Our formal role ends at closing, though lenders generally call and we help from knowing the file. See what happens in a foreclosure in Costa Rica.

A better home for the money

If you have capital you would like working — and you would rather not have that conversation at a family dinner — look at the current lending opportunities or contact GAP Investments. Every file is yours to accept or decline, and no outcome is promised.

This article is for general information only and is not investment, legal, or tax advice. All lending and investment decisions should be made based on independent due diligence and with qualified professional guidance.

Article by Glenn Tellier (Founder of CRIE and Grupo Gap)