Explanation on what can go wrong if Hooks were called inside loops or nested functions?

The Rules of Hooks section states that the first rule of Hooks is to only call hooks at the top level, i.e. "Don’t call Hooks inside loops, conditions, or nested functions". Later in the section, it explains what happens if we put a Hook call inside a condition. This still leaves me with some questions/doubts though. Are there examples where something can go wrong if Hooks were:

• called inside a loop?
• called inside a nested function? Furthermore, isn't a custom hook just a nested function? 🤔

I've tried to dig into some related questions on Stack Overflow here and here, but the answers provided only give the correct examples, but not the incorrect ones.

Could you provide incorrect examples for the other two cases? Or at least a little bit clarification would be most appreciated. :)

Start with the Rules of Hooks section, especially the existing explanation of conditional Hook calls. Add incorrect examples or clarification covering Hooks in loops and nested functions, including how custom Hooks differ, and consider the work done when these cases are clearly explained in the documentation.