Navigate to this option by going to your website admin, browse to Appearance > Customize > Menus > Select a Menu > Add Items.
You can add any custom link, be it external or internal. However, a custom link option is mostly used to include an external link in the menu as its better to have internal links referenced to a specific page (in case the url changes, the menu item will still work).
Just enter the URL in the input box under the “Custom URL” tab. You can then enter a Link Text in the input box next to it. It lets the user see the linked text, rather than just a link.
Finally, click on “Add to Menu” and voila! Your new link is added in the selected menu.