The "vector" values in the "AlignToVector" command are the 1-dimesional deferences inbetween the wheels.
Is this correct?
Pretty much.
Now how does "AlignToVector" know to align to the car to the terrain? Does "Collisions" take care of that?
Blitz collisions prevent penetration with the terrain so the wheels are always sitting just on top or above. Strictly speaking you're not aligning the car to the terrain, you are aligning the car to the wheels. The result gives the impression of alignment with the terrain.