A lot of misunderstanding about Hell comes first from a misunderstanding about Heaven. It is necessary, then, to explain Heaven in it's actual Biblical and Traditional description; Heaven is not "a good place." There will not be beer and twinkies in Heaven. There will be God.
Now, to a Christian, this is wonderful news. We are called to give up to passions of the flesh in order to seek God; why would it bother us if nothing worldly was in Heaven, so long as God is? However, odds are that if you're not a Christian, the idea of an eternity-long worship service sounds… pretty boring to you. Probably not what you'd like to do all your eternity. Probably, I would even say, sounds like hell to you.
So, a loving God isn't gonna force you to go to Heaven, where you'll be miserable. Instead, He, in His mercy and love, let's you go somewhere else. Unfortunately, there is only one somewhere else (+purgatory, if you're not Prot).
Hell, then, isn't "a bad place." It's merely a place where people who want nothing to do with God go. Then, because all good things come from God, good things in Hell become scarce/non-existant, and then Hell itself becomes a hell as we traditionally think of it, and then those without God become bitter, hate, and sin more, and Hell gets a little bit worse, and so on and so on for eternity.
It isn't that God punishes people for not being near Him. He makes sure they wouldn't go to Heaven, where they'd be miserable forever. Hell is just the only alternative for these people, and the actions of both these wayward souls and the demons make Hell into an awful place.