Personally, I would (and did) go with the orthopedic (egg carton shaped) foam pads covered with a zippered, easy to wash, faux sheepskin top/faux flannel back cover that are made especially for dog crates. They're better for the puppy's bones and joints, aren't prone to being chewed, and stay put on the bottom of the crate where they belong. It's a good idea to get two covers so there's one in the crate while the other is in the wash. The foam pads themselves are hand washable if soiled.
Shelters use loose, quilty things because they're free and very low maintenance. It's that simple. I'd never crate my own dog on anything that flimsy/swallowable/uncomfortable/unhealthy. Health and safety outweigh cute and crafty. Just my opinion of course, and that of the breeders I know and those I am related to.
Sheltie hair never hurt my washer and dryer, so yours should be fine. Keeping the filters, not just the vents, clear on both machines is the secret. Dog hair
did kill two vacuum cleaners, but that's a whole 'nother story.
