Loaiza, who won 21 games for the Chicago White Sox in 2003, is accused of possessing more than 40 pounds (20 kilograms) of heroin and cocaine and meant to sell it.
Police said Loaiza, a former All-Star pitcher who had a 14-year Major League Baseball career, was stopped for a traffic infraction on Friday. The 46-year-old retired pitcher is scheduled to appear in court in Chula Vista, California.
Loaiza was arrested on suspicion of drug smuggling after San Diego County Sheriff's officers who pulled him over for a traffic violation found a "sophisticated" compartment used to hide items being imported or exported illegally, in his vehicle.
He has been booked on possession of over 20 kilograms of cocaine, possession of cocaine for sale and transportation of cocaine.
Deputies searched his rented home in Imperial Beach and said they discovered packages of white powder they believed to be cocaine. Coming off of an injury-plagued season with the Yankees and White Sox, Loaiza rebuilt his stock in D.C. and split for Oakland and greener pastures after the season.
Loaiza's former agent, John Boggs, told the San Francisco Chronicle that he was unaware of the drug arrest and hadn't spoken to him recently.
His bail, subject to change, was set at $200,000.
It was not immediately known if Loaiza had hired a lawyer and he could not be reached to comment.
Born in Tijuana, the Mexican city across the border from San Diego, Loaiza became a celebrity in his native country after marrying the late Mexican-American singer Jenni Rivera.
Loaiza, who last pitched in the majors in 2008, made over $40 million in his 13-year career. "I don't know how he would get himself involved in this, so it's hard to even comment on it".