Nobody ever waits until they're 18 before becoming interested in sex, so naturally there was a time when I looked for drawings of girls my own age. Of course there were still some pictures that looked too young to me even back then, but there were other pictures that where crafted so well that I simply could not overlook their quality.
... And now I know why.
Loli's are not kids, they're short characters in "child" roles.
... And this is intentional.
So what is this... thing??
A "loli" is a convenient character design for a sexual story. It fills a "child" role in ways that a real kid definitely wouldn't. Unrealistic characters create unrealistic situations in order to portray inherently unrealistic fantasies. Simulating realism is obviously not the goal here.
It all depends on the story.
Okay but... why?
Naive characters create a lot of sexual suspense. They'll walk straight into sexy situations while missing all the obvious clues being presented for the audience. This allows the story to clearly promise a sexual outcome for the audience to anticipate, and build sexual tension from the start. It's perfect for creating suspense.
Loli characters also tend to have an authority imbalance with other characters which make it easy for a story to put them into situations, or you can reverse the roles to create unexpected and surprising situations where a naive character unwittingly orders other people into compromising situations.
No. Imaginary things are not illegal. In the US, there used to be a law way back in 1996 criminalizing any depiction of minors in a sexual context, which also included fictional characters for some reason. By 2002, courts realized that worrying about imaginary people obviously wasn't going to save any real people. In their words, fictional depictions "... record no crime and create no victims by their production." The intent of the law is to prevent actual harm to actual people... who actually exist.