The loan providing companies find it hard to give loans to the people due to their insufficient or non-existent credit history. Because of that, some consumers use it as their advantage by becoming a defaulter. When the company receives a loan application, the company has to decide for loan approval based on the applicant’s profile.
Two types of risks are associated with the bank’s decision:
- If the applicant is likely to repay the loan, then not approving the loan results in a loss of business to the company.
- If the applicant is not likely to repay the loan, i.e. he/she is likely to default, then approving the loan may lead to a financial loss for the company.
- This case study aims to identify patterns which indicate if a client has difficulty paying their installments which may be used for taking actions such as denying the loan, reducing the amount of loan, lending (to risky applicants) at a higher interest rate, etc. This will ensure that the consumers capable of repaying the loan are not rejected.