It's a virtual (none-physical) interface. Basically a way of accessing the device itself without sending a signal out a physical interface.
It's useful in some situations. For example, In OSPF routing (were a router ID is defined as the highest IP value of all interfaces), it's useful to define a "loop back" interface and assign it a very high IP, to make sure that the router always has this defined ID no matter what physical interfaces are up or down.
An other use, is when certain software defines a "loop back interface" on a PC. For example VMware does similar things to allow virtual machines to communicate together all inside the PC.
On any PC, the IP 127.0.0.1 is defined as a default loop back interface. successfully pinging this 127.0.0.1 is typically used to ensure that the TCP/IP stack is working correctly.
More here:
en.wikipedia.org/wiki/Loopback
