There is a decent amount of nuance here. Let me start with your example setup and explain in detail. If you want a summary, you can skip to the end and reference above as needed.
for example, say that I'm using VPN and that my internal IP address is
192.168.0.1, which from now on I'll refer to as localhost.
First, let's call this IP address "internal", as "localhost" has a specific meaning in network terms.
There is another, more relevant, IP address that is your public IP address. Let's refer to that as "external"
There is also the remote system you are trying to communicate with, let's call that "remote".
There is an IP address associated with your VPN provider or TOR tunnel that you connect to. Let's call this IP: "entry"
There is also an IP address associated with the exit of whatever VPN or privacy enhancing tool (e.g. TOR) you use. Let's call it: "exit"
VPN CASE
Let's say you have a VPN configured and running. I'll work through how the traffic looks through each step, and then show the default (no VPN) setup at the end.
VPN setup, traffic going from "internal" to "remote"
Inside your network, between "internal" and your router:
- Traffic appears to be going from "internal" to "entry" (and back)
- Traffic is encrypted, so only the source and destination are visible, not contents.
- This is typically a trusted network, so usually this is considered limited risk.
Outside your network, between "external" and "entry" (your ISP, and any intervening ISPs):
- Traffic appears to be going from "external" to "entry" (and back)
- Traffic is encrypted, so only the source and destination are visible, not contents.
- This is typically an UN-trusted network. You are protected against ISPs observing the contents of your traffic, and you are protected against any of these ISPs knowing the final destination of your traffic ("remote").
Outside your network, between "entry" and "exit":
Here it matters what tool you are using. For a typical VPN provider (NOT TOR):
- Traffic appears to be going from "external" to "remote"
- Traffic is unencrypted, so the apparent source, destination and contents (unless also encrypted, e.g. SSL/TLS) are visible to the VPN vendor.
- This is typically a trusted network; you are paying the vendor to protect your privacy. Whether this is wise is up to you.
For TOR, they manage to do this in such a way that:
- Traffic to any individual node either appears to be going from "external" OR going to "remote", but NOT BOTH.
- Traffic is encrypted most of the way, so the contents are unencrypted (same caveats as above re: SSL/TLS) only for the exit node, which knows "remote", but doesn't know "external". Only the entry node knows "external", and it doesn't know the contents of the network traffic.
- This is typically an untrusted network, designed to avoid you having to trust it.
Between the VPN provider ("exit") and "remote":
- Traffic appears to be going from "exit" to "remote".
- Traffic is NOT encrypted (same caveats as above re: SSL/TLS).
- This is typically an untrusted network (the Internet) and includes the remote host. Notably, the remote host does not know your "external" IP address.
NO VPN CASE
The unprotected communication is much simpler and looks like:
Inside your network, between "internal" and your router:
- Traffic appears to be going from "internal" to "remote" (and back)
- Traffic is unencrypted, so the source, destination and contents are visible on the wire.
- This is typically a trusted network, so usually this is considered limited risk.
Between the your router ("external") and "remote":
- Traffic appears to be going from "external" to "remote".
- Traffic is NOT encrypted (same caveats as above re: SSL/TLS).
- This is typically an untrusted network (the Internet) and includes the remote host. Notably, the remote host DOES know your "external" IP address.
So, what are you getting from a VPN or TOR?
- Your ISP knows you are using a VPN, but doesn't know the contents of the traffic, or what remote hosts you are communicating with.
- The remote hosts you are communicating with MAY know you are using a VPN, but don't know your external (Internet side) IP address.
- The VPN provider may know what sites you are communicating with and be able to observe the traffic. They are now effectively in the same role as your ISP was before you set up a VPN.
- A TOR node cannot associate your external IP address with the remote site you are visiting, and cannot automatically associate the contents of the traffic with your external IP address.