I am using a newer nightly, but I'd think the process is the same as with older builds.
In Settings | Preferences, head to video. It should show you options there about your snapshot. Including snapshot format (default is png, alternate is jpg), as well as snapshot directory.
I did read in a prior thread that the pic directory often defaulted to "my pictures." Not sure if this was ever fixed. However, if you still can't find your pics, search for vlcsnap*.png (or vlcsnap*.jpg) and wherever it shows up is apparently where its being saved. Heh.
I also remember several older nightly builds where the screenshot function did not work properly. Newer builds have fixed teh error, though.
When your video is open, on the top menu, go to video, then go down to snapshot. If it works right, you should see a snapshot in the top left of the video, of teh picture you just took.
Also, you can right click on the video as its playing, and in the middle section, should be an option to "snapshot" as well.
Or, go the keyboard route, and at the place you want teh snapshot, Ctrl+Alt+S. You can try to change this by going into Settings | Preferences - Interface | Hotkey Settings. MAke sure advanced options is checked, because "Take Video Snapshot's" hotkey is apparently advanced.
As for overlay, if the program includes a built in snapshot function, why would you want to disable overlay/hardware acceleration, hit prntscrn to take a capture, paste into a graphics editing app, crop/resize, then save, when all you had to do is hit ctrl+alt+S and its automatically saved. But, whatever works.
Hope something there helps.