The 22-year-old is poised for his first sustained experience of Championship football after joining the Blades, who were beaten in last year’s play-off final.
Barry’s move comes just weeks after a proposed £3.5million permanent switch to Hull City broke down at the 11th hour due to concerns the Tigers would not be able to fund the deal.
The agreement with Sheffield United does not include an option to buy but Villa will hope a successful season in the second tier will raise the profile and value of a player Unai Emery has deemed surplus to requirements.
Barry is well-known to Blades boss Ruben Selles, who was in charge in Hull when they signed the Villa man on loan for the second half of last season.
Though injury limited him to just four appearances, Selles remains a big admirer and Barry was high on his list of targets when he replaced Chris Wilder in the Bramall Lane hotseat.
“The first time I had conversations about it, I just couldn’t wait to come here,” said Barry, after completing the move. “The season is three weeks away, and I know we have a couple of friendlies before, but I am just buzzing to get started.
“I’ve been at Villa, playing games, training and working hard just for whatever will come next. As I say, when a club like this comes calling, you can’t turn it down and I can’t wait to get into it.
“I love his (Rubén Sellés) style of play, it is exactly what I stand for as a player. I just want to get to the goal as quick as possible. I have got a really good relationship with the gaffer and the staff, so I can’t wait to get into training now.”
Barry’s loan helps to further reduce Villa’s wage bill after the previous departures of Kaine Kesler-Hayden, Philippe Coutinho and Enzo Barrenechea this summer, with the latter having joined Benfica on loan in a deal which includes an option to buy.
The club are also willing to offload Alex Moreno, Leander Dendoncker and former record signing Emi Buendia in the current window.
Buendia, who joined four summers ago from Norwich in a deal worth £38m, has been tracked by newly-promoted Leeds but there has so far been no formal approach.