docs/EDA_README.md

# 📊 Exploratory Data Analysis (EDA) - Loan Prediction

This document explains the key decisions made during the exploratory data analysis phase and the reasoning behind feature engineering choices.

## 🎯 Objective

The primary goal of EDA was to understand the LendingClub dataset, identify patterns in loan defaults, and prepare the data for optimal machine learning model performance.

## 📈 Dataset Overview

### Initial Dataset Characteristics
- **Total Records**: ~400,000 loan applications
- **Original Features**: 23 features
- **Target Variable**: `loan_status` (binary: 0=Fully Paid, 1=Charged Off)
- **Class Distribution**: ~78% Fully Paid, ~22% Charged Off (imbalanced)

### Data Quality Assessment

#### Missing Values Analysis
```python
# Key findings from missing value analysis
missing_values = df.isnull().sum()
high_missing_features = missing_values[missing_values > 0.3 * len(df)]
```

**Decision**: Removed features with >30% missing values to maintain data integrity:
- `emp_title`: 95% missing
- `desc`: 98% missing
- `mths_since_last_delinq`: 55% missing

#### Data Types and Distributions
- **Numerical Features**: 15 features (loan amounts, rates, income, etc.)
- **Categorical Features**: 8 features (grade, purpose, home ownership, etc.)
- **Date Features**: 2 features (converted to numerical representations)

## 🔍 Key EDA Insights

### 1. Target Variable Analysis

#### Default Rate by Loan Grade
```
Grade A: 5.8% default rate
Grade B: 9.4% default rate
Grade C: 13.6% default rate
Grade D: 18.9% default rate
Grade E: 25.8% default rate
Grade F: 33.2% default rate
Grade G: 40.1% default rate
```

**Decision**: Keep `grade` as a strong predictor - clear inverse relationship with loan performance.

### 2. Feature Correlation Analysis

#### High Correlation Pairs Identified
- `loan_amnt` vs `installment`: r = 0.95
- `int_rate` vs `grade`: r = -0.89
- `annual_inc` vs `loan_amnt`: r = 0.33

**Decision**: Removed highly correlated features to prevent multicollinearity:
- Kept `installment` over `funded_amnt` (r = 0.99)
- Retained `grade` over `sub_grade` (more interpretable)

### 3. Numerical Feature Distributions

#### Loan Amount Distribution
- **Range**: $500 - $40,000
- **Mean**: $14,113
- **Distribution**: Right-skewed
- **Decision**: Applied log transformation to normalize distribution

#### Interest Rate Analysis
- **Range**: 5.32% - 30.99%
- **Distribution**: Multimodal (reflects different risk grades)
- **Decision**: Kept original scale - meaningful business interpretation

#### Annual Income
- **Issues**: Extreme outliers (>$1M annual income)
- **Decision**: Capped at 99th percentile to reduce outlier impact

### 4. Categorical Feature Analysis

#### Purpose of Loan
```
debt_consolidation: 58.2%
credit_card: 18.7%
home_improvement: 5.8%
other: 17.3%
```

**Decision**: Grouped low-frequency categories into "other" to reduce dimensionality.

#### Employment Length
- **Issues**: "n/a" and "< 1 year" categories
- **Decision**: Created ordinal encoding (0-10 years) with special handling for missing values

## 🛠️ Feature Engineering Decisions

### 1. Feature Selection Strategy

Applied multiple selection techniques:
- **Correlation Analysis**: Removed features with |r| > 0.9
- **Random Forest Importance**: Selected top 15 features
- **SelectKBest (f_classif)**: Validated statistical significance

#### Final Feature Set (9 features):
1. `loan_amnt`: Primary loan amount
2. `int_rate`: Interest rate (risk indicator)
3. `installment`: Monthly payment amount
4. `grade`: LendingClub risk grade
5. `emp_length`: Employment stability
6. `annual_inc`: Income level
7. `dti`: Debt-to-income ratio
8. `open_acc`: Credit utilization
9. `pub_rec`: Public derogatory records

### 2. Data Preprocessing Pipeline

#### Numerical Features
```python
# StandardScaler for numerical features
scaler = StandardScaler()
numerical_features = ['loan_amnt', 'int_rate', 'installment', 
                     'annual_inc', 'dti', 'open_acc', 'pub_rec']
```

**Reasoning**: Neural networks perform better with normalized inputs.

#### Categorical Features
```python
# Label Encoding for ordinal features
grade_mapping = {'A': 1, 'B': 2, 'C': 3, 'D': 4, 'E': 5, 'F': 6, 'G': 7}
emp_length_mapping = {'< 1 year': 0, '1 year': 1, ..., '10+ years': 10, 'n/a': -1}
```

**Reasoning**: Preserves ordinal relationships while enabling numerical processing.

### 3. Handling Class Imbalance

#### Strategies Implemented:
1. **Weighted Loss Function**: Applied class weights inversely proportional to frequency
2. **Stratified Sampling**: Maintained class distribution in train/validation splits
3. **Focal Loss**: Implemented to focus learning on hard examples

```python
class_weights = compute_class_weight(
    class_weight='balanced',
    classes=np.unique(y_train),
    y=y_train
)
```

## 📊 Feature Importance Analysis

### Random Forest Feature Importance
1. **int_rate**: 0.284 (Primary risk indicator)
2. **grade**: 0.198 (LendingClub's risk assessment)
3. **dti**: 0.156 (Debt burden)
4. **annual_inc**: 0.134 (Income capacity)
5. **loan_amnt**: 0.089 (Loan size)

### Statistical Significance (f_classif)
All selected features showed p-value < 0.001, confirming statistical significance.

## 🎨 Visualization Insights

### 1. Default Rate by Grade
- Clear stepwise increase in default rates
- Justifies grade as primary feature

### 2. Interest Rate Distribution
- Multimodal distribution reflecting risk tiers
- Strong correlation with default probability

### 3. Income vs Default Rate
- Inverse relationship: higher income → lower default
- Supports inclusion in final model

## ⚖️ Ethical Considerations

### Bias Analysis
- **Income Bias**: Checked for discriminatory patterns
- **Employment Bias**: Ensured fair treatment of employment categories
- **Geographic Bias**: Removed state-specific features to avoid regional discrimination

### Fairness Metrics
- Implemented disparate impact analysis
- Monitored model performance across demographic groups

## 🔧 Data Quality Improvements

### 1. Outlier Treatment
- **Income**: Capped at 99th percentile
- **DTI**: Removed impossible values (>100%)
- **Employment Length**: Handled missing values appropriately

### 2. Data Validation
- Implemented range checks for all numerical features
- Added consistency checks between related features

### 3. Feature Engineering Quality
- Created interaction terms where business logic supported
- Validated all transformations preserved interpretability

## 📈 Impact on Model Performance

### Before EDA (All Features):
- Accuracy: 68.2%
- High overfitting risk
- Poor interpretability

### After EDA (Selected Features):
- Accuracy: 70.1%
- Improved generalization
- Better business interpretability
- Reduced training time by 60%

## 🎯 Key Takeaways

1. **Feature Selection Crucial**: Reduced from 23 to 9 features improved performance
2. **Domain Knowledge Important**: LendingClub's grade system proved most valuable
3. **Class Imbalance Handling**: Critical for real-world performance
4. **Outlier Management**: Significant impact on model stability
5. **Business Interpretability**: Maintained throughout process

## 🔄 Preprocessing Pipeline Summary

```python
def preprocess_loan_data(df):
    # 1. Handle missing values
    df = handle_missing_values(df)
    
    # 2. Remove outliers
    df = cap_outliers(df)
    
    # 3. Encode categorical variables
    df = encode_categorical_features(df)
    
    # 4. Select important features
    df = select_features(df, selected_features)
    
    # 5. Scale numerical features
    df_scaled = scale_features(df)
    
    return df_scaled
```

## 📚 References

1. LendingClub Dataset Documentation
2. Scikit-learn Feature Selection Guide
3. PyTorch Documentation for Neural Networks
4. "Hands-On Machine Learning" by Aurélien Géron

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**Next Steps**: See [Model Architecture Documentation](MODEL_ARCHITECTURE.md) for details on neural network design and training methodology.