How do Annotations works internally in Java or any other programming language?

I having hard time understanding importance and benefits of Annotations and so have two questions regarding them:

1. What are the benefits of Annotations as compared to XML Configuration?
2. How do Annotations work internally?
3. Is it fair enough to say that annotation binds application tightly whereas with XML Configuration Application is loosely coupled?

Would appreciate pros and cons comparison with XML Configuration with example so that it would be much more helpful for me to understand.

Regards.