The distinction between Katakana and Hiragana helps with reading. Not because you can distinguish loan words from other words, but rather because you can easier break the sentence apart.
Usually, the parts of a Japanese sentence written in Hiragana are particles, modal verbs, inflectional endings, etc., which usually follow parts written in Kanji or Katakana. So every time the system switches back to Kanji/Katakana,
there is usually a semantic break.
To illustrate this: While
seems unparsable, adding katakana and kanji breaks it up nicely:
スモモも 桃も 桃のうち
(Spaces mark the switch back to kanji/katakana)
While most originally Japanese words have kanji, most (Western) foreign words
don't, but especially for foreign words readers may need some aid to detect the word boundaries. it also helps differentiating function words from the names. In
we can see clearly that there are two names, and が and を are not part of them. (There are better examples)
Since learning additional <50 chars on top of the >2000 (essential) kanji is not too big a burden, the benefits outweigh the costs.
Well, most of this could also be achieved with spaces...