DiabloWiki Term
In terms of the Diablo Wiki, "settlements" include any somewhat inhabited outpost, hamlet, town, city, metropolis, castle, keep or the like. Please note that some outposts, castles and keeps might also be a structure, and they are both considered a location.
The reason that "settlement" is used to describe congregation of sentient beings is that it can apply to regular human cities, angel fortifications or demon castles without having to use multiple terms to define them all.
Towns
The main distinction here is that the term "town" is used frequently in the Diablo games to describe the "safe area" that players visit to heal up or visit vendors to sell their loot.