Two reasons. A round hole in an STL is a polygon, and its flat sides sit inside the circle you modelled. And FDM printers squeeze plastic slightly into holes. The add-on corrects both: polygon compensation puts the flats on the diameter, and the hole compensation (default 0.2 mm) is added on top. An M3 screw hole is then 3.60 mm across its narrowest width.

For the common short brass inserts (for M3: a 4.0 mm hole for a 5.7 mm long insert). The pocket is 1 mm deeper than the insert so melted plastic has room. The docs list every size. If your inserts differ, use the Round hole type with a blind depth and your own diameter.

Yes. Set Place at to Selected faces, select the faces in Edit Mode (for example the four corner faces of a lid) and click Add Hole once. You get one hole at the centre of every selected face.

Turn on Keep editable before you add it. The hole is then a Boolean modifier with a wire cutter object parented to the part, which you can move. Click Apply Holes when you are happy, or Ctrl+Z to undo a hole.

Check 1 Blender unit =. With Blender's default scene 1 unit is 1 m, so an STL in millimetres imported as 40 units is 40 m wide and an M3 hole looks tiny. Choose 1 mm for STL files.