So we should tolerate placing the burden of compensating for that risk on the poor people who do pay their loans back? It's somehow okay that we're punishing the people who found themselves in a desperate situation who actually are responsible enough to pay their debts, because it makes business sense given that other poor people aren't?
You don't mean it's "somehow okay", you mean "it's somehow morally right". No, it isn't morally right. The world isn't fair. The world isn't kind. However, not having this form of credit available at all would be even more unpleasant for those who need it, so all things considered I'd rather these businesses exist than not.
I still remember earning under-18 minimum wage and being happy if my disposable income after rent and food was $15 a week. In those situations, credit of any kind is far better than no credit at all - if the person in question considers the terms unacceptably usurious they always have the option of not taking those terms. All regulation would achieve is to eliminate such businesses - effectively the government taking that choice away because somehow allowing people to choose is not "somehow okay".
It isn't fair. It isn't morally good. It isn't pleasant. But it is what it is. Welcome to reality - sometimes it really sucks.
Then maybe the loan shouldn't be getting made. If an industry can't ethically do business, maybe it shouldn't exist. If there's a serious problem that industry is solving (and there is), then maybe it's time for society to step in.
Welcome to reality - sometimes it really sucks.
I'd like to think that drawing attention to suckage could result in people doing something to make it suck less. We don't have to blindly accept our current reality, we can work to change it.
But if you're a priori indistinguishable from people who have a default rate, yes, you will pay more. You can't be given a retroactive discount any moreso than the defaulters can be retroactively denied their loan. Them's the breaks. Knowledge is imperfect; time does not run in reverse.
But even that reform is double-edged: by cleaving away the clearly reliable it raises the effective rates for all those left behind at the worst categorization.
And the repayment odds are unlikely to be binary, or stable: someone who repays one loan (but still looks like a defaulter in other respects) may be nearly as likely to default on a subsequent loan. A borrower may at some point even consider a default their 'due', if they look at all the fees they've paid. So the idea that one agency would just specialize in the 'hardest' cases, and never reclassify someone, may make good business sense without being irrational or malicious. The proper 'escape' is then going to another lender (or even better to stop borrowing), rather than renegotiating with a bottom-predator.