Lagging power factor refers to a situation in an AC electrical system where the current phase lags behind the voltage phase. This typically occurs in inductive loads, such as motors and transformers, where the magnetic field created by the current needs time to build up, causing a delay in the current wave relative to the voltage wave. Understanding lagging power factor is crucial as it relates to the concepts of apparent, real, and reactive power, affecting how efficiently electrical energy is used in circuits.