I remember in college a friend had a boxed set of the first 5 Nightmare movies and we binged through them in a couple nights one time. I remember 3 as my favorite and one of the few we watched multiple times after the full binge.

I don’t remember exactly why it was my favorite at the time. I’m sure some of it was the lore of it. Freddy’s lore was inconsistent and all over the place in the first two films, but the third coheres it, and most of the rest take 3 as a canon given. I don’t think the rest would exist without 3. It’s 3 that elevates Freddy from just another scarred weirdo serial killer to a full blown Boogeyman (and starts the debates if Freddy is The Boogeyman of modern horror). 3 sets him apart from Mike Meyers and Jason Voorhees and gives him a legitimate unique threat (to the point where he can share movies with Jason and they fill very different roles in those movies, whether or not you think those movies are actually any good, and we watched most of those in other college binges.)

You suggest it might have been better as a standalone, but I think it’s kind of more interesting as the franchise definer (and sort of franchise peak) for Freddy. I don’t think the first two would be considered as much classics if the third didn’t try to make sense of their conflicted lore and take it to weirder places, they might not have stood the test of time quite as well, unlike either of Jason or Mike’s first outings.