This is a great concept for a game. The big flaw is that progress can feel a bit slow at first. It's frustrating when whatever you're doing gets interrupted by the demon.
My suggestion? Add achievements for completing certain quest lines, with a large one-time bonus to progress in certain stats. For example, becoming an ally of the elves could make it so on subsequent playthroughs, you can learn elven language much faster along with a bonus to precision; helping the fairy could give you a bonus to alchemy.
This would solve the main point of frustration by giving the player a clear road to progress. Even if you can't beat the demon on this loop, you still accomplished something significant if you get an achievement.