Custom templates change the look and feel of a block. Every block can have custom templates, which are custom bits of PHP code in your website's file system.
When you are in edit mode for a page, you can choose to set a custom template for a block. When clicking on a block, instead of hitting Edit, pick Custom Template:
From the Custom Template interface, you will see a drop down menu of available templates:
The Auto-Nav block is a great place to start when thinking about custom templates. The Auto-Nav block brings back part of the site tree you define with settings. On its own, it always displays the results as an unordered list in HTML. Without any further work, a new Auto-Nav on your site could look like this:
If we choose the Responsive Header u custom template for this instance of the Auto-Nav block, it will look something more like this:
Same data, but different styling thanks to a Custom Template.