Castro is the capital of Chiloe Island. It is located on the island's eastern coast, halfway between Ancud in the north and Quellon in the south, and is a convenient base for exploring the island of Chiloe.
There are two bus terminals in Castro. The main bus terminal is at the intersection of Sotomayor and Esmeralda, near the main plaza. Here you can find frequent connections to Puerto Montt (about 2 hours) on the mainland. There are several buses a day to Santiago (16 hours, usually overnight) as well as most major cities on the way. All of these buses stop in Ancud on the way, and the ferry crossing is included in the price.
You can find local buses (micros) at the Terminal Municipal, located a few blocks away from the main bus terminal at San Martin and Aldea. Buses to Dalcahue (1 hour), Achao, and Chonchi stop here. The bus to the Chiloe National Park stops here as well; there are several companies leaving at different times of the day.
You can also enter with a rental car. There is a fee for the ferry, but having your own transport is a very convenient way to explore Chiloe.
Castro itself is very small and can easily be navigated by foot.
The tourist office in the main plaza is quite helpful and can furnish you with a map of Castro which has a suggested walking tour on it. The tour takes 2-3 hours depending on your pace. The tourist office is open daily 9am-6pm.
Most of the restaurants and cafes in Castro are concentrated along the Calle Blanco, running from the southern end of the plaza down to the waterfront.
There are tons of lodging options in Castro, so you should have no problem finding a place to stay by just walking around and asking.
Quehui Island is an attraction for visitors, 2.5 hours by public boat, leaves Castro at 4pm daily from the rampa. Overnight accommodations and tours are available from Turismo Quehui (http://www.turismoquehui.cl/home_ingles.html).