1. It is virtual interface, NOT physical like ethernet or serial.
2. It is always UP by default.
3. It is useful for SNMP management purpose and telneting to device.
And I use is for BGP balancing purposes, since I have 4 T1 with my ISP, we set bgp peering by means of a loopback, so the router will fwd packets thru the 4 T1s since it knows peer address by all these links.
The loopback interfaces are simply software interfaces.
The interfaces are configured for some cases in addition to
the reason explained by our friends.
For example, If ur router is running OSPF,then in that
case if u required to reboot ur router then during bootup it will search for atleast one active interface if it doesnt find that it will give error & wont be up.In this case active interface will play important role as it will be up during bootup as well.
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