Well, 'Hostel' is indeed based on a true story. The director got the idea from tales he heard about certain hostels in Europe where travelers had some really terrifying encounters. But in the movie, a lot of elements were added to make it more of a horror - thriller, like extreme violence and gore that might not have been exactly as in the real incidents.
Hostel isn't based on any true events. It's a product of the filmmaker's imagination and designed to entertain with its horror elements and plot twists.