ON is the default and is what you would expect. Trailing spaces are saved in VARCHAR and in CHAR additional spaces added to fill the entire space. When ANSI_PADDING is off then additional spaces are not saved .. unless the column is CHAR AND NOT NULL.
So there’s the first reason to not turn ANSI_PADDING off. Most people expect the ON results and the OFF results can be .. let’s just say confusing.
Click through for more details, including how painful it is to change the setting on a column after the fact.