A loan with an option to buy is a temporary transfer in which the borrowing club has the right, but not the duty, to sign the player permanently at a price fixed in advance. If the club declines, the player simply returns to their parent club when the loan ends.
The appeal for the borrowing club is that it gets a season to find out whether the player fits, at a price it has already locked in. If the player is a success the fee cannot be raised, and if the player struggles the club walks away having paid only the loan fee and a share of the wages.
The selling club takes the weaker side of that bargain, and an option is therefore usually cheaper than an obligation. It has committed to a price without any guarantee of a sale, and it may get the player back a year older with a season of uncertainty behind them.
Options are often written with triggers attached. A club might hold the option only until a set date, or the price might rise if the player passes a certain number of appearances, which stops the borrowing club playing them heavily and then buying cheap.