I have on of those nifty rj-tech dvd players

And what I do is basically en-code a divx or xvid movie, through it on a dvd or cd-r. And play. The player is capable of mpeg-4 so All I need is a file on a disc, BUT I don’t really know the bet resolution to use. If I have a move that is captured from a dvd source or a high resolution source I have no problem using 720x480. Although If my source is vhs low res I'm told its best to capture at 640x480 and not 256x224 do to he scan lines. but If I play a 640x480 on my dvd player, I get what looks like a pal video. It’s black and white and has a horizontal control problem.
SO... my question is If I capture at 640-480, and encode to divx at 256x224 will I lose quality? I would think so. Or should I use 352x240 (VideoCD NTSC)? I have it working, but not good enough. I just need some understanding or some one with experience or knowledge to talk to.