You make an understatement when you say a lot less than you could. If you say "We didn't do our best" when your team loses 56 to 0, that's quite an understatement.
An understatement can be just the thing to make someone feel better. For example, if you are a terrible dancer and everyone seems to be pointing and laughing at you, your friend might say your style is unique. She's not lying, but she is making sad truth easier to deal with. Understatement can also be used humorously — if you have a really difficult, scary experience, you might say, "Well, that was interesting."