"Direct" is not the same in both cases.
When "Use Oracle Client" is checked, (or Toad 15.0 and prior), "Direct" is a way to connect without having to use TNSNames.ora. But the connection still goes through the Oracle client.
In 15.1, when "Use Oracle Client" is unchecked, Toad connects directly to the database. No Oracle client is used or even needs to be installed.
It may be for the best to keep an older Toad around for Oracle 8i. That's probably more convenient than turning the "Use Oracle client" option on and off.