Loopback interface is generally used by routers or Layer 3 capable switches so that they have a reliable IP interface for routing updates.

In other words, a loopback interface is a special virtual interface created in software. It has no associated hardware interface and is therefore always up. One use of such an interface is to simply assign an IP address to the router as a whole rather than to a specific hardware interface. This allows the assigned IP address to be used to access the router, for example, Telnet, regardless of which real interfaces are up or down. Loopback interfaces are also used by some protocols. For example, the Loopback IP address can be used to assign the OSPF Router ID.

There is no limit on the number of loopback interfaces you can create. Loopback interfaces do not have internal VLAN IDs or MAC addresses.

The Layer 2 switches like 3500xl or 2950, the loopback interface is not needed since these switches are not capable of routing between interfaces. The management vlan of the switch acts like the loopback interface since they are both logical interfaces.

When you have a Layer 3 switch, like a Catalyst 3550 or 3750, to configure loopback interface from the config mode, complete these steps: 

Switch#configure terminal

Switch(config)#interface loopback 1

Switch(config-if)#ip address  

Switch(config-if)#exit