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There is something I find myself doing often while writing, and I don't even know what to call it, but I would like to know if its good practice. It happens when I'm writing from a third-person perspective. It's where the narrator begins to describe something based not on truth, but on a character's (potentially skewed) perspective. Here's a random example:

There is a peaceful alien race that has never done anything bad to humanity, however John falsely believes that these aliens killed his father, however the reader knows that this is not true, his father's death had nothing to do with the aliens. So the reader knows these aliens are innocent, and when John is saying bad things about them the reader will disagree with him. There are two ways I could narrate this

1: the 'plain way'

John thought to himself 'Those wretched slimy creatures! I hate them!'

or 2 is the way I'm asking about (that I don't really know what to call)

John thought about how much he hated those wretched slimy creatures.

Obviously those 'wretched slimy creatures' are not as bad as John makes them out to be, and the reader and narrator both know this. Is it a good idea to have the narrator describe them as 'slimy wretched creatures' when describing John's opinion of them, or just to use the 'plain way' by not even appearing to adopt John's view and just tell it like it is. Personally I prefer way 2, because it makes it more interesting and less plain, but I don't want it to seem like I'm contradicting myself.

This depends on the narration. If you have a third person omniscient narrator then they usually would describe things in a fair and even way. Most modern writing though does not use an omniscient narrator. Most writing is done in third person limited.

In third person limited the camera stays consistently over a specific character's shoulder for often at least a chapter if not the entire novel. In this case the narrator should absolutely take on the characteristics of the character being followed by the camera. All descriptions should be done through the lens of that character. All his knowledge and prejudices should be applied to descriptions. If it a character would not know what something is, the narrator should describe it in that way. Explain how the character sees the object, not what it is by name. If the character has beliefs then the narrator should have the same beliefs about the concept.

This is often a great tool if the camera ever moves to another character. The same things can suddenly be described in completely different ways. This can give the reader a great depth into not only your characters but also the setting.

Jane Austen is the master of Free Indirect Speech, a 3rd-person style where the narrative voice becomes the direct thoughts of a character.

In your example it would work something like:

John hated them. Slimy, wretched creatures!

It's an immediate, emotional style, that bypasses the "He thought to himself…" and states the character's opinion as objective fact when it clearly isn't.

From wikipedia: "What distinguishes free indirect speech from normal indirect speech is the lack of an introductory expression such as "He said" or "he thought"."

In practice, Austen changes the matter-of-fact "truths" from her narrator so often and quickly that the reader is always aware which character has taken over the story. Their emotional state colors the world that is being described in ways that aren't possible or contradictory.

It's not an unreliable narrator so much as a sympathetic narrator caught up in the emotions of the characters.

For example in Emma:

Emma’s spirits were mounted quite up to happiness; every thing wore a different air; James and his horses seemed not half so sluggish as before.

Austen has simple plots but complex characters who are opinionated on just about everything. Her style is usually interpreted as satire, because her characters are generally so opinionated that they get themselves in trouble especially when the characters are naive or plain wrong – however the intimacy of the Free Indirect Speech makes even unlikeable characters sympathetic to the reader. We see their flaws, but we also hear them in their own words, as if directly out of their heads.

This essay on Medium goes into more examples how Austen undermines her own narrator to signal the bias to her readers.

This is called "close third-person" POV. It's kind of a hybrid where you present the world in the third-person, but from the perspective of a given character (as you would do in first person). It's a common technique, and one that is perfectly fine to use. The major warning is that you need to be cautious if you are switching back and forth between this and third-person omniscient, or if you switch POV characters, because either switch has the potential to confuse your readers.

I think I can see what you are asking but I'm not sure.

Narrators can take on the bias, prejudice or thoughts of a character. The most obvious example I can think of is a poem called 'Southern Cop'. That doesn't mean that the writer holds those views.

Direct speech/thought has a different impact to indirect. I think the first version is much more vivid, with one little correction: you can't really think to anyone other than yourself.

While narrating an incident, we can use the 'Plain way' as you mentioned. But what if the readers want to know about the thoughts going inside a person about a specific incident or person, in this conditions, your story should be able to convey the thought process rather than direct speech about thoughts as it may or may not have the impact we want our readers to feel. In some case, it might turn out to be a negative effect.

As an author, if you don't let your reader feel a character's feelings when it would be appropriate, or shield or "mute" the feelings from the reader, you are somewhat betraying your character, your story, and letting down your reader.

It could be that to you, the omniscient author, they are "incorrect" to you or you "know" they are "wrong", or because you don't like those feelings or you don't want to seem like you hold those feelings yourself. But if you are portraying a character, then within that story, how they feel is how they feel. They could be mistaken about something, over reacting, numbed, or have horrible beliefs and feelings (racist/sexist etc). But if that is how they feel, that is how they feel.

That's not a rigid rule, authors often break any rule you can name. But generally it seems to be a good way to think about it, unless you deliberately decide not to.

So if John thinks someone did a bad thing and is angry, but we know he's wrong, or Robert is a sexist racist narrow minded abuser who thinks he knows best, or Claire has irrational emotional reactions to aliens and thinks they are slimy, the best starting point is to let the reader feel that and share it, not to half-hide it from them because it's "not nice". The reader will feel that, and it will make the character feel a bit untrue, because how you describe the character no longer matches what you let them feel and share of the character.

How to handle it?

There are many questions about "what if my character is a racist/sexist", and the same kind of answer will apply to your character as well. You can show the reader what is happening and why, which may help.

John looked at the aliens, unable to hold back a small shudder inside. Horrible, horrible, and slimy! The memory of his father came to his mind, as it always did, the images he had never seen, but imagined - his father torn and twisted, the gloating slimy monstrous creatures kicking his bloody corpse, and laughing at his pain. One day they will pay! he promised himself silently. One day...

This doesn't just describe John's view (like your 1st idea) or add emotional distance from a deep emotion (like your 2nd idea). It actually puts the reader in John's mind -"Show, don't tell".