Consumer loans/credit charge different rates depending on the individual's risk. In particular, it charges more to poorer individuals. Whilst this seems to make sense from a risk perspective, there is some circularity involved. This is, "the more an individual has to pay, the more risk there is s/he doesn't pay".
In other words, higher interest rates increases the risk of the loan, which means higher interest rates are charged, which increases the risk of the loan, which... etc.
is this studied by economic/finance theory? Can someone explain me the circularity and provide some intuition? It's like if standard theory looks at a linear demand and supply curve, but it seems the supply curve is exponential (more cost increases the risk which increases the cost which increases the risk...).