The main sources of funds for internal debts are commercial banks and other financial institutions.
Internal public debt owed by a government (money a government borrows from its citizens) is part of the country's national debt.
It is a form of fiat creation of money, in which the government obtains finance not by creating it de novo, but by borrowing it.
In this way, the expected increase in inflation due to the increase in national wealth is lower than if the government had simply created the money de novo and increased the more liquid forms of wealth (i.e., the money supply).
"The Forgotten History of Domestic Debt" (PDF).