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Loose files are not inheritantly a bad thing,
If modding they are a must! (and by that I mean the creation rather than the use)
End users of the mod, yep avoid as much as ya can...
EDIT: should have added this, to enable loose files add this to the archive section of Fallout4Custom.ini, if the archive section isnt already there (wont be with 1'st run)
Add that also as shown below.. Should also solve load problems..
Forgot also, couple loose files here & there wont hurt anything.
[Archive]
bInvalidateOlderFiles=1
sResourceDataDirsFinal=
Loose files make your load times go up with large mods, so pack them if the mod author hasn't. E xample of a mod that needs to be packed 3DNPC or interesting npc's.
Small follower mods don't typically need to be packed, because the game can check them pretty quickly, unless you have a 100 then i would try mergeing them and then packing.
P.S.
To answer your question flat out.
Loose files means unpacked which allows you to edit them.
Packed which is putting loose files into a packed state into a bsa which can't be edited till you unpack them.
Loose files are resource files that are shared separately from plugins. They will always win all resource priority conflicts against files packed in to (BA2) archives.
Benefit of loose files is that they are never related to plugin loading archive and are usually direct replacements for official files from Main/DLC files. Not always, but often.
Downside is that large amount of loose files will increase your loading times. Conflicting files will also physically overwrite each other, unless you are using a mod manager with virtual system, like Mod Organizer 2 or Vortex.
How do I know if I need to enable Load Loose Files (this is a question for FO3, not FO4, but is on the same topic as this thread)? Is it: if I downloaded a mod that didn't come with a .esp/.esm, then I need to have it enabled?
-RH_Ironsights
-First person mod
-Eve
-Weapon retexture
I always recall that being complicated to setup as when i did it MO2 and vortex werent a thing and required specific and multiple patches. Luckily for you using MO2 or vortex nothing overwrites in terms of actual files so messing up is almost impossible. Honestly I dont think there is any good reason to use loose file except maybe for load order limits.
Oh and make sure you use correct file extension. I forget what older bethesda games use but now there is esm/esp/esl. At this point there has to be a insane number of guides most are fine just ignore everything sinitar (on youtube) says and only use him and find out about mods at most lol.