LOAN APPROVAL PREDICTION USING MACHINE LEARNING

Abstract:
The process of loan approval is crucial for financial institutions, as it involves assessing the
risk associated with lending funds. Traditional methods for loan approval are time-consuming
and often subjective, leading to delays and inconsistencies. To address this issue, machine
learning (ML) models have been increasingly employed to automate and enhance the
accuracy of loan predictions. This project explores and compares multiple ML models,
including XGBoost, Random Forest, Support Vector Machine (SVM), and Logistic
Regression, to determine the most effective approach for loan approval prediction. The
models are trained on historical loan data, considering various financial and demographic
features of applicants. A comparative analysis is conducted based on performance metrics
such as accuracy, precision, recall, and F1-score. Through this analysis, the study aims to
identify the most reliable model that minimizes errors in prediction while reducing processing
time. Preliminary results indicate that ensemble-based models, particularly XGBoost and
Random Forest, outperform other classifiers in terms of accuracy and robustness.
Implementing such predictive models can significantly streamline the loan approval process,
enhancing decision-making efficiency and reducing financial risks for lenders.
Keywords: Loan Approval Prediction, Machine Learning, Random Forest, Support Vector Machine
(SVM), Logistic Regression,XGBoost Credit Scoring, Financial Risk Assessment.

1.Introduction:
In banking and financial institutions, approval of loans is essential for institutional growth
and stability. Traditional evaluation of loan proposals is dependent on manual validation and
risk-based checks, which take time and can be subject to errors, thus resulting in over-
approval or under-approval of undeserving or default-prone clients, respectively. For this
problem, machine learning (ML) models can eliminate delays and augment predictive
accuracy regarding the approval of loans, allowing improved decision making, minimizing
default in loans, and maximizing asset deployment.
Simple ML algorithms such as Logistic Regression, Decision Trees, and Support Vector
Machines (SVMs) have been applied to loan prediction systems with satisfactory outcomes.
But when loan data is increasingly complex, there is a requirement for more complex models
to handle complex relationships and enhance prediction accuracy. Class imbalance, where
approved loans outnumber defaults by far, is one of the major challenges in loan prediction.
This may skew the predictions towards the majority class (approved loans). To address this,
sophisticated models like Random Forests, XGBoost, Neural Networks, and SVM have been
used to enhance accuracy and manage class imbalanceThis paper examines the use of these
machine learning models to predict loan approval improvement, based on features such as
credit score, income, amount of loan, and employment status. The decision-making process is
automated by the system, aiding financial institutions to reduce risks and make the approval
process more efficient, while being free from prejudice and making informed decisions.
The subsequent sections deal with the training dataset, the algorithms used, their evaluation
parameters, and results achieved.
2 Related Work

The advancement in machine learning has significantly improved loan approval prediction by
enhancing prediction accuracy, reducing misclassifications, and offering more reliable
decision-making processes in financial institutions. Loan approval prediction models are
increasingly critical in banking, credit scoring, and financial management, leading to quicker,
more accurate loan processing and reduced default rates. Research efforts are continually
focused on improving model robustness, scalability, and interpretability in real-world loan
approval scenarios.

1. X. Zhang et al. [1] explored Explainable AI (XAI) for loan approval prediction to
offer transparency in machine learning models without sacrificing accuracy or
interpretability. The approach achieved 90% accuracy on multiple financial datasets,
balancing transparency and performance. This work highlighted how explainability
can build trust in AI-driven financial decisions.
2. S. Kumar et al. [2] applied Random Forest and Support Vector Machines (SVM) to
predict loan approvals and credit risk, focusing on feature extraction for loan
eligibility prediction. Their model achieved 95% accuracy on the Lending Club
dataset, although it required substantial computational resources for training.
3. M. Gupta et al. [3] tested Federated Learning for loan approval prediction, ensuring
data privacy and secure data sharing across multiple banks. The model achieved 93%
accuracy on the FICO credit scoring data, but challenges such as device
synchronization and communication overhead were encountered.
4. J. Singh et al. [4] used Random Forest and Decision Tree classifiers to predict loan
approval based on various applicant features such as credit score, income, and
employment status. Their model achieved 92% accuracy on the Credit Scoring
Dataset, but the method faced scalability issues with larger datasets.
5. Y. Zhao et al. [5] employed Deep Learning techniques, particularly LSTMs, to
predict loan approval decisions based on historical loan data and applicant behavior.
Their model reached 94% accuracy on the Bank Loan Dataset, though the model
required significant amounts of training data, making it computationally expensive.
6. D. Lee et al. [6] proposed a real-time loan approval prediction system using deep
neural networks (DNN), achieving 96% accuracy on the Loan Prediction Dataset.
However, the model required high computational power and extensive network
bandwidth, making it challenging for use in resource-constrained environments.
7. L. Chen et al. [7] applied transformer-based self-supervised learning (SSL)
techniques for loan approval prediction and achieved an impressive 97.5% accuracy
on the FICO score dataset. Despite its excellent performance, the method had
limitations, such as the need for large pretraining datasets and the associated
computational cost.
8. K. Patel et al. [8] explored Transfer Learning with Convolutional Neural Networks
(CNNs) for predicting loan approval. Their approach, applied to multiple datasets
such as UCI Loan Dataset and PAMAP2, achieved 95% accuracy. However, the
method was limited by the requirement for large labeled datasets for training.
9. R. Sharma et al. [9] proposed ensemble learning techniques combining Random
Forest, SVM, and XGBoost for loan approval prediction. This ensemble model
achieved an accuracy of 98% on the Lending Club dataset. While this method
provided high accuracy, it faced challenges regarding computational cost and resource
allocation during real-time predictions.
3.Loan Prediction Methodology:The process of loan approval prediction using machine
learning begins with importing and preprocessing the loan data. The dataset is cleaned by
handling missing values and encoding any categorical variables if needed. Next, the data is
split into two subsets: a training set, which is used to train the model, and a testing set, which
will be used to evaluate the model's performance. A suitable machine learning algorithm,
such as Random Forest, Decision Tree, or Logistic Regression, is selected and trained on the
training set to identify patterns and relationships in the data that can predict whether a loan
will be approved. Once trained, the model is used to make predictions on the testing set. The
predictions are then compared with the actual loan approval results, and the model’s
performance is evaluated based on metrics like accuracy, providing insights into how well the
model can predict loan approvals.
Collection of Data set

Feature selection using info gain of features

Train model on training data set

Test the model on testing data set

Result analysis

Figure 1: Flowchart of Loan Amount Prediction

A.Alogithms Used
a). Random Forest Favoured algorithm for machine learning. A component of
supervised learning technique is Random Forest(RF). It will be used for ML problems
involving both classification and regression. It is, based on concept of ensemble learning,
which is technique for, integrating many classifiers, to handle tough problems and develops
performance of the model. It name suggests that "Random Forest is a classifier that
contains a number of decision trees on various subsets of the given dataset and takes the
average to improve the predictive accuracy of that dataset". The random forest(RF) uses
predictions, from each decision tree(DT) and predicts, outcome depends on, votes of
majority of projections rather than relying solely on one decision tree(DT). The Random
Forest method is best shown by the diagram below:
b). Decision Tree
The prediction model known as decision tree(DT) uses, flowchart, structure for base
decisions on incoming data. Data branches are built, and the results are placed at nodes
of leaves. Decision trees were used to provide models that are simple to comprehend
to regression, and classification problems. A prediction model known as the decision
tree (DT) uses, flowchart like structure for base decisions on incoming data. Data branches
are built, and the results are placed at leaf nodes. Decision trees (DT) were used to
provide models that are simple to and suitable to both classification as well as the
regression applications. Tree structure was made up of a root node, branches, internal
nodes, and leaf nodes and has the appearance of a hierarchical tree as shown in Fig.3

Figure 3: Flowchart for Decision Tree (DT) Algorithm

The Support Vector Machine (SVM) is a predictive model that utilizes a hyperplane-based
structure to classify incoming data. It constructs decision boundaries by identifying the
optimal hyperplane that best separates different classes in a high-dimensional space. The
SVM model is widely used for classification and regression tasks, offering a robust approach
to handling both linearly and non-linearly separable data. Kernel functions play a crucial role
in SVM by transforming input data into higher dimensions to make it linearly separable. This
supervised learning technique is effective for complex decision-making scenarios where high
accuracy and generalization are required.
 Figure 4:Flowchart for svm algorithm
The XGBoost (Extreme Gradient Boosting) model follows an ensemble-based structure
that iteratively refines predictions by combining multiple decision trees. It is a supervised
learning algorithm used for both classification and regression problems. XGBoost builds
trees sequentially, where each new tree corrects the errors of the previous ones using gradient
boosting. The model is highly efficient, leveraging parallel processing and optimized
memory usage to handle large datasets effectively. XGBoost applies regularization
techniques like L1 and L2 to prevent overfitting, making it one of the most powerful
machine learning algorithms for structured data. The key components of XGBoost include
decision trees, gradient boosting framework, and regularization mechanisms, forming a
structured and hierarchical model for predictive analytics.

Figure 3: Flowchart for XGBoost Algorithm

3.1 Data Collection and Preprocessing
The dataset used consists of loan application records with the following key attributes:
 Applicant Information: Age, Income, Employment Type, Credit Score
 Loan Information: Loan Amount, Loan Term, Interest Rate
 Credit History: Number of previous loans, Default History
 Other Factors: Co-applicant details, Property Area
Preprocessing Steps:
 Handling Missing Values: Imputing missing values using mean/median for
numerical data and mode for categorical data.
 Feature Encoding: Converting categorical variables (e.g., Employment Type,
Property Area) into numerical format using One-Hot Encoding.
 Normalization & Scaling: Scaling numerical features to ensure models train
effectively.
 Train-Test Split: Splitting the dataset into 80% training and 20% testing data
4.Implementation Details (Modules):
4.1. Loan Dataset : Loan Dataset is very useful in our system for prediction of more accurate
result. Using the loan Dataset the system will automatically predict which costumer’s loan it
should approve and which to reject. System will accept loan application form as an input.
Justified format of application form should be given as an input to get processed.
4.2. Determine the training and testing data: Typically , Here the system separate a dataset
into a training set and testing set ,most of the data use for training ,and a smaller portions of
data is use for testing. after a system has been processed by using the training set, it makes
the prediction against the test set.
4.3. Data cleaning and processing:In Data cleaning the system detect and correct corrupt or
inaccurate records from database and refers to identifying incomplete, incorrect, inaccurate or
irrelevant parts of the data and then replacing , modifying or detecting the dirty or coarse
data. In Data processing the system convert data from a given form to a much more usable
and desired form i.e. make it more meaningful and informative.
4.4 objective
The objective of this project is to develop an accurate and efficient loan approval prediction
model that can classify loan applications as approved or denied. The system will utilize
various machine learning algorithms, such as Random Forest, Decision Trees, and Logistic
Regression, to analyze factors such as credit score, income, loan amount, and employment
status. The aim is to create a reliable model capable of making quick, data-driven decisions to
assist financial institutions in automating the loan approval process while minimizing risks
and errors.

4.5 Feature selection

 Credit Score: A key indicator of an applicant's creditworthiness, directly impacting

loan approval.
 Income Level: Helps assess the applicant's ability to repay the loan based on their
earnings.
 Loan Amount: The size of the loan requested, which determines the level of financial
risk.
  Employment Status: Provides insight into the applicant’s job stability and income
consistency.
 Debt-to-Income Ratio: Measures the applicant's current debt load in relation to their
income, indicating repayment capacity.

Proposed Rule Extraction Methods for Loan Approval Prediction using Machine
Learning

Prediction Phase:

In this phase, different machine learning models—Random Forest, Support Vector Machine
(SVM), XGBoost, and Linear Regression—are used as weak learners for prediction. Each
model is trained iteratively, with misclassified loan applications receiving increased weight in
subsequent iterations. The boosting process aims to correct errors and improve classification
accuracy. The final prediction for each loan application is determined by aggregating the
predictions from all models. For models like Random Forest and XGBoost, the majority
voting technique is used to make a decision (approved or denied). For Linear Regression,
predictions are thresholded to map continuous outputs to binary labels (approved or denied).
The predictions from each model are then combined to generate a new dataset of predicted
class labels, referred to as P.

Rule Extraction Phase

In the Rule Extraction Phase for loan approval prediction, the predictions from machine
learning models like Random Forest, SVM, XGBoost, and Linear Regression are used to
generate interpretable "if-then" rules. Rule extraction techniques such as Decision Trees,
RIPPER, and Bayesian Networks are applied to the predicted data. Hybrid methods like
Random Forest and Decision Tree, SVM and RIPPER, and XGBoost and Bayesian Networks
are employed to generate clear rules for loan approval. These rules help explain the model’s
decisions based on features like credit score and income. The aim is to provide transparency
and better understanding of loan approval predictions.
Dataset Description And Experimental Setup
Kaggle contains, number of loan default prediction data sets. Kaggle is a well-known
platform for, machine learning (ML) competitions. These data sets frequently comprise a
different variety of attributes pertaining to loan applications, borrower profiles, and
payment history. We imported Loan Dataset from Kaggle.
Experimental Setup
Different classifiers such as Random Forest, SVM (Support Vector Machine), XGBoost, and
Linear Regression are considered for loan approval prediction using machine learning. The
base learner, SVM, is sourced from LibSVM (Chang & Lin, 2011), while WSVMBoost is
implemented using the MATLAB MEX interface for boosting. The performance results
presented for each model are the averages of G-mean and F-measure from ten-fold cross-
validation. In ten-fold cross-validation, each sample is trained and tested at least once,
ensuring effective generalization and a robust evaluation of each model's performance for
loan approval predictions.
Performance metrics
Machine learning models can exhibit a diverse range of characteristics and behaviors, making
it challenging to identify the optimal model for a given task. Consequently, it is crucial to
possess a set of tools that can assess the performance of machine learning models effectively.
Several commonly employed quality control measures in machine learning are outlined
below. Among these measures, the accuracy, precision, recall, and F1-score stand out as the
most widely used method for evaluating model performance. The confusion matrix for
computing accuracy, precision, recall, and F1-score is presented below.
 1.True Positives occur when the prediction is YES, and the actual output is YES.
 2.True Negatives occur when the prediction is NO and the actual output is NO.
 3.False Positives occur when the prediction is YES, but the actual output is NO.
 4.False Negatives occur when the prediction is NO and the actual output is YES.

6.RESULTS AND DISCUSSION

We will go each steps of the program. Firstly, Python programmers frequently use the
function df.head() to show the first few rows of a DataFrame object. You can examine
a preview of data in the DataFrame df by executing the function df.head(). The
DataFrame df's first five rows will be printed to the console when this code is run.
The head() function accepts an integer as an input if you want to display a different
number of rows. For instance, df.head(10) will show the DataFrame's top ten rows.

A short overview of a DataFrame's structure and column information, including the

data types and memory utilization, is provided by the df.info() method in the Pandas
package for Python. The Pandas library's df.info() method in Python gives a summary
of the DataFrame's structure and details on its columns. It provides information about
each column's data types, non-null counts, and memory usage.
Df.isnull() code.Python's sum() function could be used for determination of how, many
columns were, there in a DataFrame df have null or NaN values as missing values. It
gives a full list of all columns' missing values.

The code snippet df['LoanAmount_log'] = np.log(df['LoanAmount']) determines the

natural logarithm of the 'LoanAmount' column in the DataFrame df and assigns the result to a
new column designated as 'LoanAmount_log'. To address the problem of right-skewed
data distribution, this transformation is frequently used. The code in the next line,
df['LoanAmount_log'].Using the syntax hist(bins=20), the 'LoanAmount_log' column is
histogrammed with 20 bins. You can see the distribution of the modified loan amounts
using the histogram

Figure 7: Plot of Log scaled Loan Amount

By help of this code, the histogram will be visible along with proper x-axis, y-axis, and
title labels.
Figure 8: Plot between Loan Amount v/s Frequency
In the Fig.10, first section, df['Gender']. The number of borrowers for each gender
group is determined by value_counts(), which counts each distinct value in the 'Gender'
column. Then, print() is used to print this information.

Random Forest is robust to feature scaling since it selects split points based on feature values
rather than distances. Standardization has minimal impact on its performance but can help
when combining with other models. It reduces overfitting by averaging multiple decision
trees for better generalization.
A) Random Forest

Using RandomForestClassifier from sklearn.ensemble, the model is trained on X_train and

y_train using the fit method, learning patterns between features and the target variable. Once
trained, the rf_clf model can predict new data using the predict method. Random Forest, an
ensemble learning technique, improves prediction accuracy by combining multiple decision
trees, making it effective for handling complex datasets.
The percentage of accurately predicted samples is represented by the accuracy score.
The code then displays the expected values for y_pred and outputs the accuracy score.
The accuracy obtained from Naive
Bayes algorithm is 83.73% and is as shown in the figure.
B) Decision Tree

Feature Importance
Let us find the feature importance now, i.e. which features are most important for this
problem. We will use feature_importances_ attribute of sklearn to do so. It will return the
feature importances (the higher, the more important the feature).

C)XGBoost
XGBoost works only with numeric variables and we have already replaced the categorical
variables with numeric variables. Let’s have a look at the parameters that we are going to use
in our model.
Logistic Regression
we will start with logistic regression model and then move over to more complex models like
RandomForest and XGBoost.
Table 1: Accuracy of different Algorithms
Sl.No Algorithm Accuracy
1. Random Forest 77.23%
2. Decision Tree 63.73%
3. XGBoost 83.73%
4. Logistic regression 96.73%

7. Conclusion
In this project, various machine learning models, including Random Forest, SVM, XGBoost,
and Linear Regression, were employed to predict loan approval decisions. To enhance the
interpretability of these complex models, rule extraction methods such as Decision Trees,
RIPPER, and Bayesian Networks were applied. These methods successfully transformed the
model predictions into clear and understandable "if-then" rules, which allowed for greater
transparency in the loan approval process. By using techniques like cross-validation and
boosting, the models demonstrated robust performance, ensuring that loan approval
predictions are both accurate and reliable. This approach not only improves decision-making
but also builds trust with users and stakeholders by making the model's reasoning more
transparent and interpretable.
Future Work
 Feature Engineering: Incorporate additional features like bank transaction history,
customer behavior, etc.
 Deep Learning Models: Experiment with Neural Networks for improved predictions.
 Explainability: Use SHAP values to explain model decisions for regulatory
compliance.
By integrating ML-based automation into financial services, institutions can achieve faster,
data-driven, and more reliable loan approval decisions.
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