An effects loop is a series of audio effects units, connected between two points of a signal path (the route that a signal would travel from the input to the output); usually between the pre-amp and power amp stages of an amplifier circuit, although occasionally between two pre-amp stages.
The two principal uses of effects loops are in recordings and in instrument amplifiers.
The first is that generally effects sound clearer and are more pronounced when the input signal is sent through a preamplifier prior to being affected.
For example, most guitar rack equipment works better at line-level, and not instrument level.
By placing the effects after the preamp, signal loss due to impedance mismatch is avoided.