URL encoding, or percent-encoding, replaces characters that have a reserved meaning in a URL with a percent sign and their hex byte value. A space becomes %20, an ampersand becomes %26, and so on. Without it, any value containing a separator character would break the URL it sits inside.
The usual reason to reach for this is a query parameter that contains something awkward: a search phrase with spaces, a redirect target that is itself a full URL, an email address, a filter expression with equals signs and commas. If those are not encoded, the ampersand in your value gets read as the start of the next parameter and the request silently means something different from what you intended.
The important choice here is between encoding a whole URL and encoding a single component, and getting it wrong is the most common mistake with this operation. Whole-URL encoding leaves the structural characters alone, so the slashes, the question mark, and the parameter separators survive and the URL still works. Component encoding escapes those too, which is what you want when the value is going to be embedded inside another URL as a parameter. Encoding a whole URL when you needed a component produces a redirect parameter that truncates at the first ampersand.
The tool also breaks a query string into its individual key-value pairs and decodes each one, which is the fastest way to read a long tracking-laden URL and see what is actually being passed.