As he's heading home from his quest, the knight meets the loathly lady standing in the middle of a field, the only remnant of a circle of ladies who were dancing there and disappeared.
The loathly lady offers to tell the knight what women most desire if he promises to grant her next request.
After the knight agrees, the loathly lady tells him what women most desire.
After the knight successfully answers to the queen's court of ladies, the loathly lady asks the court to make sure the knight grants her request, which is that he marry her.
When the knight tells the loathly lady that he is aghast that his wife is so old, ugly, and low-born, she lectures her husband on the origins of gentility and the virtues of poverty, ugliness, and age.
The loathly lady offers her husband two choices: he can have her ugly but faithful, or beautiful but with no guarantee of fidelity.
When her husband tells her to make the decision, the loathly lady asks him if he really yields sovereignty to her. When he says yes, she transforms into a young, beautiful damsel.