Peer-to-peer loan acceptance and default prediction with artificial intelligence: P2P Default Prediction with AI

Turiel, J. D. and Aste, T. (2020) Peer-to-peer loan acceptance and default prediction with artificial intelligence: P2P Default Prediction with AI. Royal Society Open Science, 7 (6). ISSN 2054-5703

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Abstract

Logistic regression (LR) and support vector machine algorithms, together with linear and nonlinear deep neural networks (DNNs), are applied to lending data in order to replicate lender acceptance of loans and predict the likelihood of default of issued loans. A two-phase model is proposed; the first phase predicts loan rejection, while the second one predicts default risk for approved loans. LR was found to be the best performer for the first phase, with test set recall macro score of 77.4%. DNNs were applied to the second phase only, where they achieved best performance, with test set recall score of 72%, for defaults. This shows that artificial intelligence can improve current credit risk models reducing the default risk of issued loans by as much as 70%. The models were also applied to loans taken for small businesses alone. The first phase of the model performs significantly better when trained on the whole dataset. Instead, the second phase performs significantly better when trained on the small business subset. This suggests a potential discrepancy between how these loans are screened and how they should be analysed in terms of default prediction.

Item Type:	Article
Additional Information:	: © 2020 The Authors.
Divisions:	Systemic Risk Centre
Date Deposited:	23 Aug 2022 09:42
Last Modified:	19 Oct 2024 17:27
URI:	http://eprints.lse.ac.uk/id/eprint/116375

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