There are many who don't wear panties at all because they don't like the elastic band rubbing against their tail's root

They're a minority but there are the people who wear fundoshi and people who wear loincloths too.

Elastic band or string

People with short tails often wear skirts that don't have a hole at all.

The size of the hole is decided based on the fluffiness of the tail.

If the hole is too big people can see in, and if it's too small the chafing hurts.