What's the difference between fey and demons?

[thorr-kan]

There are many layers of reality. Angels are up, demons are down, and fey are sideways.

In classical myths, these things usually correspond to "mountaintops/clouds/stars/other places in the sky", "inside volcanoes/on the bottom side of the world", and "hidden around the corner/in the deep forest/buried inside the hills".

And aberrations are from OUTSIDE.

Joking aside, your analogy above is an excellent shorthand for mapping classical myth into D&D. I've often theory-crafted Faerie, the Plane of Shadow, and a Spirit Plane as beside/co-existant/just out of sight of the Prime Material.