Concept of a decision support system for a loan granting based on continuous price function

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Loan provision is associated with a credit risk. Banks assess the creditworthiness of potential borrowers to lower a credit risk. Creditworthiness assessment is carried out by credit scoring methods. Most of these methods classify individuals into two categories: ‘good’ or ‘bad’ creditworthiness. Decision support system for loan granting based on these methods fail to differentiate the loan price for private borrowers. In practice, banks mostly grant loans applying decision support system that makes no price differentiation for individuals according to their private information. A bank may differentiate a loan price to attract a specific group of borrowers. In this paper, loan price differentiation impact on the behaviour of banks potential borrowers in the market for consumer lending is analyzed. A concept of a decision support system for loan granting based on the use of a continuous loan price function of the borrower's creditworthiness rating is proposed. Competition between banks using different loan price function of creditworthiness rating is analyzed. Borrowers with a low credit risk are interested in switching to a bank that reflects more private information in a loan price. Application of the proposed system provides a competitive advantage for a bank to attract borrowers with a low credit risk. It is shown that fuzzy logic has a potential to be applied in a decision support system based on continuous price function for granting a credit.