Letterboxing is the art of adding cinematic bars to match your shot to the commonly used aspect ratio without stretching or cropping it. In other words they are small sticks that you can apply to your footage to give it an uneven aspect ratio while keeping the 16:9 dimensions.
It can crop images shot at 16:9 to a more cinematic 2.35:1. It's also a good tool to pre-visualize how your video will be cropped on an irregularly sized screen. Just fill in the empty spaces on the sides or top/bottom with cinematic bars. Otherwise, you'll have to stretch or crop your shots, which can degrade the quality of the footage.
Why should you use it?
You should use letterbox as it transforms your footage from a home video to a movie. You can also use the letterbox feature to fit your video to whatever platform or screen you need.
Also, the technical rationale is that you avoid awkwardly cropping or resizing your footage. Without a letterbox, filming at 2.39:1 looks tense on a typical 16:9 screen.
How templates differ from cropping footage;
It determines how your image will appear directly from the camera when you record at a particular resolution, whether it's 4096×2160, 3840×2160, 1920×1080, or 1280×720.
However, when you bring the clips into your editing program of choice, you have the option of adjusting your timeline to the resolution you want. It then crops your footage to fit that resolution.
These letterbox templates simply act as an overlay. So the overall clip will still remain no matter how big your original resolution is.