A simple answer to your question is that all mammals have hair. It is one of the criteria that scientists use to classify mammals (to separate them from other vertebrate animals such as birds and reptiles). This means that even whales, elephants and dolphins have body hair!

Why mammals developed hair in the first place we can only guess at, since no one knows for sure why evolution goes one way or the other. But a good guess would be that we evolved hair (or fur) to conserve body heat. Mammals are warm-blooded, which means that we require a high internal body temperature to survive. Very few animals other than mammals are warm-blooded. (For example, the internal temperature of most fish and reptiles is dictated by the temperature of their environment. In Antarctic fish, body temperatures can be close to freezing! To find out why the tissues in these fish don't freeze, check out this web page: http://www.tc.cornell.edu/Edu/SPUR/SPUR94/Reports/SPUR_Adam_Report.html.) One advantage to being warm-blooded is that warmer muscles can contract faster, so animals with high body temperatures can fly or run on short notice, even when it's cold outside. (Insects can't do this!)

A layer of hair or fur even as thin as the hair on our arms can trap air and create an insulating layer between our skin and the colder temperatures outside. The thicker the fur and the oilier it is the better the insulation. Obviously, the fur on a seal is going to be a much better insulator than the hair on our arms, but even a little bit of hair helps. Birds, although not mammals, do this insulation trick also: they have a layer of very fine feathers right next to their skin (called down) which traps air and keeps them warm. Humans loose most of our heat from our heads, so it makes sense that we have a lot of very thick hair on our heads. Our legs and arms have lots of powerful muscles and are easily chilled, so it makes sense that they have more hair too. Our eyelashes protect our eyes from dust and other small particles. Our eyebrows may help to cushion the large bones above our eye sockets, which stick out to protect our eyes and foreheads. Other facial hair is more complicated, and is controlled by hormones (this is why men have beards and women do not, and why men do not develop beards until they go through puberty).

There has been a gradual trend towards a loss of body hair in human evolution. MY theory of why this is (unproven and untested!) is that it is easier to increase body temperature when cold than it is to decrease body temperature when overheated. Humans can shiver, burn stored fat, or use shelter and clothing to stay warm, but to cool down we MUST sweat, and this involves a lot of water loss. Excess hair would make overheating even more likely. Since humans can quickly die when too hot or too dehydrated, evolution may have steered us toward less body hair. However, this doesn't explain why mice that live in the desert still have thick coats of fur.

Biologists look at questions like this in two ways: What does it do for us now? and How did we get it?

All mammals (things that give milk to their young) have hair.We're mammals, so it makes sense that we have hair. For most mammals, hair is important as insulation, keeping body heat in when it's cold and giving protection from hot sun. Human hair might be useful for keeping the hot sun off our head and neck, but it doesn't do much to keep us warm.

Another question might be "why do we have so little hair?" There are few bald mammals. Some marine mammals like whales and dolphins have no hair when they're born (though they have hair as fetuses). Hair creates drag in water (human swimmers often shave their bodies). Another bald mammal is the naked mole rat, which lives in the hot sand of the South African Deserts. Some people say they're the ugliest mammal in the world. You be the judge:
http://web3.si.edu/organiza/museums/zoo/zooview/exhibits/nmrats/nmrhome.htm

Biologists might suggest that we have so little hair because we evolved in a hot climate where some protection from the sun was good, but more hair made us too hot. When we moved to cooler climates, clothes, fire, and shelter helped us survive.

The second part of your question is why we have it where we have it. All of our bodies except for our palms and the soles of our feet have some hair, it's just short and fine. In fact chimps have about as many hair follicles as we do, it's just that each hair is longer. At puberty, both males and females get hair in their armpits and pubic area due to hormonal signals. Some people suggest that this actually helps to hold in odors that signal that a person has reached sexual maturity. What do you think?

Males get facial hair. This may be a signal that he has reached, or is reaching, physical maturity. Other male animals have signals like this too, for example the lion's mane. Why would this be an important signal?

Thanks for asking.