Full-coverage skins (often just referred to as“skin”) come with their own colours. As you can see above, despite the chosen skin tone being blue, the application of a full-coverage skin changes the skin colour completely. The advantage of this is that the skin consists of more than just one plain colour and subtile colour variations give it a more realistic look! Also, the included colours differ from the base game skintones. However, not all makeup and tattoos will work with these skins, but most creators do adjust their cc for skins of this type. You can also make the cc compatible yourself: see here.
Overlays are like a layer of shadows and highlights. They do not alter the skin colour, but the shading. All base game makeup and tattoos will work with overlays, but there is no variation of colours and they often look less detailed than a full-coverage skin