Terraform string interpolation lets you build strings that include variable values. You write a string with placeholders like ${var.name}. Terraform finds these placeholders, looks up the variable values, and replaces the placeholders with those values. For example, if var.name is 'Alice', then 'Hello, ${var.name}!' becomes 'Hello, Alice!'. This process happens step-by-step: starting with the template, identifying placeholders, fetching variable values, replacing placeholders, and producing the final string. If a variable is missing, Terraform stops with an error. This lets you create dynamic strings easily in your infrastructure code.