I have what seems to be a very simple question, but the more it rattles around in my head, the more confused i become.
I understand what the loopback is for, or maybe i understand this in the PC world. I understand that 127.0.0.1 is used for testing the IP stack. well my confusion comes into place when i start looking at router configs and i see that the loopback address is often given a "real" address. how can this be? this is not a physical interface correct? and why would it need a "real" address?
A loopback interface on Cisco routers is not the same as a loopback interface on a NIC. It's function is mostly used in OSPF, because in the election of a Designated Router and Backup Designated Router, the highest and second highest IP address on the area routers will be chosen. However, a loopback IP address gives the admin control of which router is picked, because a loopback IP address is considered more important in choosing the DR and BDR than any another routing interface.
There are two ways of using the loopback interface. You can make it routable by adding the network to the OSPF process, or you can skip that. Most people add it to the OSPF process, so they can ping the IP addresses, effectively making it a diagnostic interface also.