IPSEC and L2TP. (I'm not going to write a book, google on your own ;-])
Think of VPN as a wormhole through the internet that connects computer "A" (e.g. home computer) with computer "B" (e.g. work computer). PPTP VPN is not encrypted. It is used in conjunction with the Microsoft Point-to-Point Encryption (MPPE) protocol to create a secure VPN.

If you're trying to browse the internet anonymously, VPN is not for you. I would follow BFG's suggestions. Especially with using TrueCrypt ( http://www.truecrypt.org/ ). I use it at home and at work. Very easy to use and free.

If connected to a VPN, when you're visiting websites your IP is different from what your ISP has assigned to you.

Imagine you're speeding away from cops in your black/white camaro SS. You manage to pull away just enough to stop at Joe's shop and paint your SS white/black. You probably feel safer now and can dump the dead whore in your trunk somewhere in Mexico.
(camaro's color is your IP, Joe's shop is the VPN provider, Mexico is eroids.com)

Do you trust Joe? I'm asking because while he did get rid of the tracking device the car dealer installed in your car, Joe planted (painted) his own device! He probably won't talk to cops, especially if they're out of their jurisdiction.
What about if it's a Hot Pursuit, and there is FBI, DEA, NSA, CT involved? Because Joe doesn't want to close down his shop, he'll talk.
Most likely not the case, big guys are by definition not keen on working on something that doesn't in turn fill government's pockets.

Okay, let's assume Joe (VPN) ratted you out and cops now know (your ip) what kind of car you drive.
We're also assuming here they got a warrant, and your ISP has given them your home address.
It doesn't look good, they're busting in your home to find evidence. They need more than your ip, IPs can be spoofed, your computer might be hacked etc.. you could still say "It wasn't me", providing you got a good lawyer.
This is where a case is built.

• If your Hard Disk is encrypted, they will never get to your dirty folders.
• Don't keep your stash at home.

This is the most important and the most overlooked aspect of security. Deny access to sensitive data! No data, no evidence, no case.
How to effectively secure your computer and your operating system, is another story though...

What is an encrypted VNP?
Every website you visit with your computer is transferred to you in chunks of packets. These packets contain your IP addres, and the data that gets rendered on your screen.
Everything you do on the internet goes through your ISP, and they can inspect the packets (ip/data) you're requesting and sending.
What a Secure VPN (SSL) software does, is it obfuscates the data your're sending and requesting through your ISP. If they were to inspect it all they'd see is garbage. (providing they don't have the vpn software encryption key, and your software doesn't have a backdoors... etc.)

Alternative to VPN?
A safer way would be to use a TOR or FreeNode networks. The output is the same - your IP is changed. But there practically is no Joe. Well there is, but there are ten thousands of Joes. Of course these networks are pain in the ass and slow as fuck.

What is TrueCrypt?
With truecrypt you can encrypt whole Operating Systems, disk drives, partitions, or files.
Even in cases where you're forced by law to provide your encryption passwords, TrueCrypt still offers plausable deniability with "outter & inner" encryption methods. Check it out!