I am here to tell you first hand, do not buy paid links. Many will tell you that paid links do not incur a penalty with Google, but I tend to disagree. Let me give you a case in point.
My site blah.com. (that's not the real name, the real name is kept secret to protect my real job)
Once upon a time (a month ago) blah.com was rated #1 on all 3 search engines for the phrase "Blah". That makes sense for sure. I've owned this domain for more than 5 years, but only started using it for a web site about 6-9 months ago. It's been #1 or #2 for the phrase "Blah" almost since day 1.
Then I was reading in some SEO forum that it's more effective to buy one good PR paid link than doing a ton of free directory submissions. I'd like to meet the guy who made that suggestion.
Anyway, to make a long story short, life is never that easy. Now that I've purchased my link, my site has dropped out of the top on google...how low did it go? Let me put it this way, I got tired of hitting the next button. Now, I am still listed somewhere (i.e. not banner), but I am being penalized for buying a paid link (I'm sure of it).
To compound the situation, I am having trouble getting the link dir that I purchased the link on to remove it. I've sent them 4 e-mails with no responses. My next step is to try to involve paypal...but then what?
So, now I need to do everything I can to remove the link, then beg google for re-inclusion, admitting that I've been bad (even though I didn't know it) and saying that I'll never do it again.
Many "experts" will tell you that I am not incurring a penalty for this, they are WRONG. Nothing else has changed on my site and "Blah" is not a common search term (even at #1 I only got 10-20 hits a day on the site, but I was starting to get ranked on other keywords as well and traffic was starting to grow).
So Paid Link Penalties are real, deal with it, don't do it...find a better way. Nuff said.