Cache built into the CPU itself is referred to as Level 1(L1) cache or Internal cache. Cache that resides on a separate chip next to the CPU is called Level 2(L2) cache or External Cache. Some CPUs have both L1 and L2 cache built-in and designate the separate cache chip as Level 3(L3) cache. Now these days L3 cache is also built-in the CPU.
Cache that is built into the CPU is the faster than separate cache, running at the speed of the microprocessor itself. However, separate cache is still roughly twice as fast as than RAM, but it is well worth getting a CPU and motherboard with built-in cache in order to maximize system performance.
Level 1 cache, or primary cache, is a small, high-speed cache incorporated right onto the processor´s chip. The L1 cache typically ranges in size from 8KB to 64KB and uses the high speed SDRAM (Static RAM) instead of the slower and cheaper DRAM(Dynamic RAM) used for main memory. Using memory cache to hold memory values, or the most recently used data and instructions means the processor can retrieve the data from the cache instead of the system´s main memory, which is much slower then cache memory.
Level 2 cache or secondary cache, is memory between the RAM and the CPU and is bigger in size then the primary or L1 cache. L2 ATC(Advanced Transfer Cache) uses micro-architectural improvements, which provide a higher data bandwidth interface between the L2 cache and the processor core, and is completely scalable with the processor core frequency. The L2 Cache is also a unified, non blocking cache, which improves performance over cache-on-motherboard solutions through a dedicated 64-bit cache.
Since more manufactures are beginning to include L2 cache into their architectures, L2 cache is slowly replacing the L2 cache function the extra built into the motherboards between the CPU and the main memory is now being called the L3 cache.Some manufacturers have proprietary L3 cache designs already, but most desktop and notebook computers do not offer this feature yet.
So to sum it all up: Cache is a small and fast memory which can be built into the microprocessor or embedded into a motherboard. The bigger the size of the cache the more frequently accessed locations can be stored which will improve the overall performance of the computer