How does custom POI files work?

They will be loaded under Whereto::Custom POIs. See FAQ: http://www.poi-factory.com/node/21405. There is plenty of information on this site on how to organize your custom POIs. They are utilized by selecting them either as a destination, or to see the 50 closest to your location ranked in order of distance.

The answer to you specific question is that you could set some (or all) of your custom POI's up as "proximity alerts" if you want an automatic warning when you are nearby (in proximiy). When you choose to do that, you specify the warning distance when you compile the POI file. That distance is a straight approximate radial distance (in feet or miles). You could get varying style "on screen warnings" depending on your GPS model and you can link the points to an audio sound file to play whatever you choose. The sound file will be either an MP3 or WAV file depending on your GPS model.

Even using your custom POIs as proximity alerts you can still reute directly to them if you choose to do so.

You will need to do some homework learning about the Garmin POI loader capabilities to play with this stuff.

Depending on your model and the display mode icons for custom POI may show on the screen. Each model is slightly different. On my unit, custom POI icons only show if I have 3 things besides the location. I need the unit zoomed in so it shows the radius of about 3-500 feet in the 2D mode, an icon file loaded, and finally, a alert sound file. All these have to be in place with a proximity alert set. Without all these in place, custom POI do not display.

As an example, I have the Cracker Barrel POI file loaded, an icon and an alert file, but no proximity set. I do not see icons on the display for this POI even when in the parking lot. On the other hand, I also have rest areas with an icon, sound file and proximity. These will display. The only difference is a proximity setting.

Just as with the built-in POI, I can search and route to my custom POI, but I need to take the additional steps to search under Extras and Custom POI.

As to which is better, the custom POI are normally more accurate. Looking in my residential neighborhood in Mapsource, MS Streets & Trips and other software including some of the web based maps they all show business located in houses where there is no store. This is probably due to the billing address or the address on a business license being the home address of the owner rather than the actual location of the store. Custom POI are more likely to mark the physical location of the business rather than a billing address. Of course, this doesn't imply the custom POI are 100% correct either.