Lookup filter is used to filter records when we lookup for the records.

Used in Lookup dialogs.

When the child records are created, we select the Parent records. During the Parent records selection, the Lookup Filter in Salesforce will help the users to avoid selecting unwanted records. The Lookup Filters will avoid pulling the unwanted records in the Lookup Dialog selection.

In the above example, I have created a Lookup relationship(Member is parent and Interest is child).
Here, whenever we create Interest record, it will fetch only Member records with Status “New”.

Output:

Related lookup filter will be automatically created in object definition.