What is this? Is that how it works? You can only play a backup if you put the actual copy in the DVD drive?
This is ridiculous. I don't know what I'm doing wrong.
Do you know which versionof DIOS MIOS (Lite) you installed?
1.5, 2.0, 2.2 ?
Do you know which version of the loader you are using? You need the latest beta, not the latest stable release. You need one with the option to select the version of DIOS MIOS (Lite) that you want to use.
If you install DM v2.2, then in the loader you need to specify that you are using 2.2 too. If you don't match the version then it will try to boot from the disc instead of the ISO.
So, when you use a loader like configloader (for example) ... I can just put the .iso files in the same folder as my current Wii .wbfs files and the loader will see them ? Also, do the loaders get cover art for GC games as well ?
Can't now remember if I still have a GC controller

Or does the Wii 'classic controller' (the one you connect to the Wiimote) work for GC stuff ?
No, it's not the same folder.
Please, read more information on How to setup and use DIOS MIOS (Lite), there are a lot of topic about it, even this very one that you are reading has a lot of information. Read the stikied topic, read the one in the FAQ sections.
Yes, you can download covers for GC games too (might depend on the loader though).
You need a GC controller to play GC games in GC mode.
If you want to use another controller, then the console need to be in Wii mode, and the only loader doing it is Devolution, not DIOS MIOS.
But it's not implemented yet.