Can anyone explain to me the difference between peasant and villager? I can see that peasant refers to a social class, and villager refers to a physical location, but are these words interchangeable?
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A peasant might be described as of low social status, or uncouth, similar to a peon, serf, churl, boor, lout. Closer to villager are synonyms like yokel, bumpkin; but these still imply judgment or disapproval.
Villager alone lacks such a strong negative connotation. It could be used to describe someone from a village without obvious reference to their profession and without implying that they're ignorant or from the "back woods", though there are often assumptions that life in villages matches stereotypes such as being simpler, more authentic, or less modern: The villagers adjusted well after moving to the big city.
Interestingly, the etymology of both words reflects that they describe people from a physical location. Peasant is from Latin pagus "country or rural district"; villager is from Latin villa "country house, farm".
I think OP may be conflating villager one who lives in a village, with villein (or villain) a feudal serf in medieval times.
In the UK (and US, I would hope), the word peasant can't really be applied to living people except as a "metaphoric" insult, though I believe there still are people living as peasants in many other countries. @Alenanno's definition of the word is as good as any.
In the UK today, villagers are likely to be significantly wealthier than the average of the population at large, if we accept the strict definition of the word. Poor people have long since migrated to urban areas in search of work (agriculture is largely mechanised these days). Rich people can afford the higher costs of maintaining an acceptable standard of living in a remote location.
However, those wealthy village-dwellers do employ domestic cleaners, gardeners, etc., and there are always other reasons why some people in a village are relatively poor. It's my impression that some of the wealthier people do sometimes refer to their poorer neighbours collectively as "the villagers", whilst thinking of themselves as somehow above such crude social stratification.
A villager is someone who lives in a village.
A peasant, instead, is "a poor farmer of low social status who owns or rents a small piece of land for cultivation (chiefly in historical use or with reference to subsistence farming in poorer countries)." [NOAD]
They're not really interchangeable, and not even synonyms, according to the Oxford American Writer's Thesaurus. Furthermore, you can't exactly use "villager" to refer to someone who lives in a city, simply because "village" and "city" are two different types of "people agglomeration". A village is generally even smaller than a town, which itself is smaller than a city.
They are interchangeable in the context of a peasant who lives in a village, but not so for peasants residing outside a village, such as in a large city or on a farm, or for non-peasants residing in villages.
(Thanks @Martin Beckett for noticing I missed the last point)