Chiloe is an island located south of Puerto Montt so about 16 hours bus journey from the capital city, Santiago. The small island has three main towns: Ancud, Castro and Quellon. The atmosphere here is very laid back and one of the main activities is penguin watching. The penguin trip wasn't cheap so if you're planning on checking some out later on you might be able to avoid going here.
We stayed in Ancud for 3 nights at the lovely hostel, 13 Lunas, which is located directly in front of the bus station.
We went for a day trip to Castro and just had a wander around the artisanal market and admired colourful churches. From there you can get a boat trip around the smaller islands. The island is famous for its many 'Iglesias', not the singer, this meaning churches in Spanish.
Personally I preferred Ancud because it's a smaller town and has that real fisherman vibe if you know what I mean? I'm not sure if this make sense but the town was lovely, plenty of colourful wooden shaks and market stalls.