Loose knee is not a medical term and does not have a precise definition. It would be used to mean that the knee joint (stifle - the joint below the hip and above the hock) can be moved more than would normally be expected.It could be used for patellar (knee cap) luxation, total joint dislocation with damage to cruciates and ligaments or cruciate ligament rupture. I suspect it is being used to indicate that the cruciate ligament is ruptured. This injury is caused by rotating the leg while in extension usually when jumping. Alternatively, since you have a small dog, it may refer to knee caps that pop off and on the center of the knee.
Dogs with cruciate rupture dangle the affected hind leg after the injury and will slowly start to use the leg starting by gingerly placing the toe on the ground.
Definitive treatment for a cruciate ligament rupture is to surgically repair the ligament or to increase joint stability by translocating adjacent tissue to tighten the joint.
Medical treatment consisting of limited exercise and non-steroidal antiinflammatory drugs (NSAIDs) can be used particularly in smaller and older animals. It is not a cure, but the dogs will be able to heal and move. It will remain at risk for reinjury and are is unlikely to return to a high level of athletic activity.
Luxating patella will cause lameness and hopping when the knee cap pops off and moving normally when it pops back on. Eventually, the patella tends to stay off. Small dogs do amazingly well with this problem, but eventually arthritis becomes an issue. The definitive treatment is surgical. The grove in the femur is deepened and the ligaments tightened up to keep the patella in position.
Let me know if you have follow up questions.