Do Logistic regression-based loan decisions that approve all loans with greater than 0.5 probability of performing ensure profitability?
Logistic regression-based loan decisions that approve all loans with a probability greater than 0.5 of performing do not necessarily ensure profitability. While a logistic regression model can help predict the likelihood of loan performance based on certain variables, it cannot guarantee profitability.
Approving loans based solely on a probability threshold of 0.5 may result in some loans being approved that may eventually default or not generate sufficient returns. There can be other factors beyond the probability of performing, such as the borrower's credit history, income, debt-to-income ratio, and market conditions, that also influence profitability.
To ensure profitability, it is crucial to consider a comprehensive set of factors and perform a rigorous credit analysis. Lenders typically employ risk management practices, such as setting specific thresholds, performing further due diligence, and considering other variables in addition to the logistic regression model's predictions.