Loan Security: What Is A Negative Pledge?

negative pledge Negative pledges can often be required by a bank as part of the security documents before finalising a loan agreement.

What Is A Negative Pledge?

The negative pledge stops the borrower from offering additional security interests, over the secured assets, to another third party. Put more simply, the borrower is prohibited from granting security over property that is already being used as collateral.


The negative pledge acts as a security mechanism to prevent a scenario whereby different secured lenders compete with one another’s security. The negative pledge ensures the first secured creditor is not at a disadvantage in the event of borrower default. Because when the negative pledge is in place and a bank seeks recourse to the collateral, the bank’s security cannot be legally challenged.

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