Do Private Loans Only Go to Desperate or Risky Borrowers?

It is a fair question and most people arrive with the answer already formed. If somebody has to borrow privately, surely a bank looked at them and said no for a good reason.

In Costa Rica that reasoning fails, and it fails for a specific structural reason rather than as a matter of opinion.

The reason it fails

Bank credit in this country requires permanent residency, and reaching permanent residency takes four years at minimum. Not four years of good behaviour — four years of paperwork moving through a process.

So the bank did not assess this borrower and decline them. In most cases the bank never assessed them at all. They failed a status test, not a credit test, and a great many of them hold property outright with income that would satisfy any underwriter in the world.

Who these people actually are

The typical file is not a distressed one. It is a couple who sold a home in Canada, bought here for cash, and now want to release part of that value to start something. A business owner whose income is entirely real and entirely self-employed. Somebody bridging a sale that has been agreed but not completed. A developer funding one stage of a build.

Put another way, they look a lot like the neighbours you left behind — people who own their homes, owe nothing, and at home would have arranged credit over an afternoon. Here they cannot, and they know it, which is why they accept a private rate without argument.

What they are buying

Not a rescue. Speed and access. A private loan closes in weeks rather than months and looks at the asset rather than at an immigration file. For a borrower with a deadline, that is worth paying for.

And the premium is smaller than it sounds. Rates banks quote foreign applicants here are closer to private rates than most newcomers expect, so the choice is often between a private loan now and a bank loan that never arrives.

Which is not to say every file is good

Weak files exist, and the point of this article is not to wave them through. It is that the reason for the bank decline is the thing to establish, because it changes everything.

A residency decline and a decline for undisclosed debt arrive looking identical on the surface. The way you separate them is the file: the Registry study showing what is already registered against the property, the owner’s documents, the entity’s books if a company holds title, and a repayment story that names where the principal comes from. That is what the document list is for.

Why the assumption costs money

It costs in both directions. A lender who believes every private borrower is desperate walks past the strong files — the paid-off house at a conservative ratio with a clear exit — and prices everything as though it were a rescue.

Worse, the assumption crowds out the analysis that actually protects you. Borrower quality is never the first line of defence anyway. The cushion is: how far the property’s value would have to fall before your money is exposed, and whether your lien is registered first. Those hold up whether the borrower turns out to be excellent or merely adequate.

What a genuinely weak file looks like

Since the point is to read files rather than categories, it is only fair to describe the ones that deserve a no. Existing debt already registered against the property that the borrower did not mention. A requested amount close to what the property is worth, leaving no margin for a soft market or the cost of enforcement. An exit that is a hope — “we will sell it” with nothing listed, nothing agreed and no price tested.

Add to those a property that is hard to value or slow to sell, and an owner who cannot produce basic documents after several weeks. None of these are about desperation. They are about a transaction that does not have a safe shape.

Why the rate will not tell you

It is tempting to treat a high rate as the market’s verdict on the borrower. It is not — it is the price of the whole package, and the package includes the cushion, how easily the property sells, the term and how clean the paperwork is.

Two files can be quoted identically for entirely different reasons: one is a straightforward loan on unusual property, the other is a stretched loan on an ordinary house. Only the first is worth having, and only the file distinguishes them.

Read the file, not the category. Here is the full list of reasons a good borrower gets turned away here.

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