That bit does gnaw at my conscience. If I was playing EE, (I have a paladin run going in that, too), I would be a cavalier, and the Horror spell wouldn't be an issue, so the choice would be easier. In the BG2 engine, there is also a chance to hit through Mirror Images, making that also less of an issue. Although I have done the Tarnesh fight where he still could beat me with his Magic Missile barrage after Horror and Mirror Images don't work, if I got bad dice rolls and couldn't heal fast enough.
My compromise was to RP that my character isn't the "lawful stupid" type of paladin, and also considers it part of his honor to respect people's privacy. "Innocent until proven guilty." So, he doesn't go around using Detect Evil on every person he meets, but rather waits for them to show him their natures through their actions.
In this last run, after I had Jaheira and Khalid, and was going around the inn to clear the hobgobllins, Khalid's and Monty's dialogue triggered where Khalid says "Could you be less, umm, evil?" and Montaron responds by threatening his life. I took that as the perfect opportunity to kick them from my party right then and there, and as far as I know, they still live out on the road beside the Friendly Arms Inn.
Incidentally, I discovered an interesting use for Detect Evil that I had never figured out before. It shows evil creatures from all over the map in the combat log, meaning the paladin can detect over distance, and can detect creatures out of sight. So, I can use it to remind myself what kinds of creatures are nearby on a map. It gives me an RP excuse to pre-buff for certain encounters, and it can be useful for scouting ahead.
EDIT: I just saw your questions about the BG3 characters. My problem with a cleric of Shar is that I assume that the character openly worships her, and speaks of Shar often as her goddess, as well as wearing Shar's holy symbols. Shar is an evil goddess whose goal is the destruction of all light and life in the universe. I could maybe be convinced on the demonic pact thing if the guy was truly desperate when it was done, was trying to save a loved one or another innocent life, and just wound up making a terrible mistake. It would depend on the writing, I suppose.
But I have to buy the game and play it to even take a closer look at the companion characters, and my tendency is to "trust my feelings" in the case of BG3, because I don't trust the people who are writing it to give me a positive experience. I'll probably break down and buy it sooner or later, depending on what I read about it after it's out, but I doubt I'll pay full price for it.
