MD5, like other hash functions, uses the Merkle-Damgard construction. You take the message and break it up into fixed-size blocks. You start with an intialization vector (IV), which you feed into a compression function along with the first block. Take the output (it will be the same length as the IV), and feed it into the compression function along with the second message block, and so on.
Call the compression function $c$ and the "raw" (unpadded) hash function $h$, we have $$ \begin{align*} h(ZABCD) &= c(h(ZABC), D) \\&= c(c(h(ZAB), C), D) \\&= c(c(c(h(ZA), B), C), D) \\&= c(c(c(c(h(Z), A), B), C), D) \\&= c(c(c(c(c(I,Z), A), B), C), D)\end{align*}$$ with a fixed initialization vector $I$ (each letter represents a block).
Different hash functions use different compression functions. The goal is to prove that we can find a collision in the hash function only if we can find a collision in the compression function (the next step would be to argue that finding a collision in the compression function is extremely difficult).
How would this argument work? We could restate our goal as follows:
If you give me two messages that cause a collision in the hash function, I can find two pairs of inputs for the compression function that cause a collision.
Here's how I do meet this goal: I take the two messages you give me, and split them into blocks. Then I find the right-most block that the two messages don't have in common. For example, if the first message (after padding) has blocks $ZABCD$ and the second has blocks $XKCD$, then third block from the right is different ($B$ vs. $K$).
Since $h(ZABCD) = h(XKCD)$, I check to see if $h(ZABC) = h(XKC)$. If not, I have my collision:
$$ h(ZABCD) = c(h(ZABC), D) = c(h(XKC), D) = h(XKCD). $$
On the other hand, if $h(ZABC) = h(XKC)$, this isn't really a collision for $c$, since the input values are the same. So I go back a block and see if $h(ZAB) = h(XK)$, and do the same thing. If they are not equal, I have a collision: $c(h(ZAB), C) = c(h(XK), C)$. If they are equal, I go back another block.
But now that $B \neq K$, I don't need to worry about whether or not $h(ZA) = h(X)$. I know that $c(h(ZA), B) = c(h(X), K)$ (because $h(ZAB) = h(XK))$, and since $B$ and $K$ are distinct, this is a collision – different inputs, same output.
I can go through this processes for any pair of inputs that generate a hash function collision in order to find a pair of inputs that cause a compression function collision. QED, right?
But wait!
What if when I go from right-to-left, I run out of blocks before I find two that are different? Then the argument breaks. So for the argument to work, I need my padding scheme to ensure that one (padded) message is never the tail end of another.