A village functions similarly to castle as a place of trade and commerce. The number of village in a realm is random, sometimes you can find two or three villages at once per quest.
Any adventurer and traveller are welcome, at here they can pray to Gygax, sleep at inn (restore 1 Hp), buy meals for 30 gold, trade and meet a fortune teller ( cost: 25 gold, chance to curse, can tell what mosnter will you encounter in next X days, chance to increase 1 magic, unusable during Inquisition).
Rule of thumb: no criminals may enter a village, by the king's order. So remember, be 'clean' as a paladin and hey, you can enjoy it if you make it in STWALT.