How can loans work with bitcoin? Before answering this question please go through this scenario
Let's assume that we have now become a bitcoin-only economy and nearly all bitcoins have been mined. Now, someone wants to do business and he needs bitcoin loan, which a lender will provide him at 10% interest. After one year, the borrower has to pay back bitcoins, which now have a increased value, plus the interest. Thereby, he has two forces acting against his borrowing - the interest and deflation.
In fiat, interest and inflation cancel each other out which promotes borrowing; that's a healthy thing. But in the bitcoin economy a borrower has to fight against deflation and interest. If interest rate gets lower than zero, lenders would have no incentive to lend.
So, this makes bitcoin as a replacement for fiat useless as according to the above scenario lending doesn't work out in this economy.
Further, if somehow we make it work, where will the interest amount come from? There will be more btc to be repaid than actual btc we have and this will lead to creation of IOUs and fractional reserve. In essence, we will be reinventing the wheel.
In Fiat Interest and Inflation cancel each other and promote borrowing and thats a healthy thing, but bitcoin economy a borrower has to fight against deflation and interest, if interest rate gets lower to zero then lenders will have no incentive in lending


At a basic level, the person providing the loan hopes to receive a small return (interest) for providing the capital, and the person receiving the loan hopes to use that capital to make profits in the short term.

Removing inflation from the equation (eg by providing a BTC loan) does raise the bar for what could be considered a profitable venture for the loan taker, but that does not mean every loan will no longer be profitable. Rather, it just incentivizes individuals to seek out ventures which have a higher chance of turning more profit. 

In my opinion, the argument of "nobody will spend a deflationary currency on anything!" is silly. Individuals will still have to spend, they may just have a higher threshold for the question of "what is worth buying? (or investing in?)". Even if your money is deflationary, you'll still have to pay rent, because its better to have a safe place to live than to have a little more money in the future, but nowhere to sleep. 


  Further if somehow we make it work, where will the Interest amount come from ?There will be more btc to be repaid then actual btc we have


Interest on a loan will come from profits made by utilizing the loan. This is no different than a loan denominated in dollars: when you pay the loan back, the interest you pay is not 'freshly minted money', it is just money that already existed in the system, but you are now the owner of. 

In general: Use-cases for bitcoin are not dependant on how well the system mimics the lending properties of the traditional banking system, in fact bitcoin is likely useful because it has different properties than the traditional system. Bitcoin is a decentralized, permissionless, borderless, immutable and programmable system of value. What exactly the implications of this are is a story that is still unfolding, but it certainly does promise many exciting things. I think one of the most important is that it grants the user financial sovereignty, which is a rare and important thing in our increasingly Orwellian tech world.