What is the difference between an interlock and a transfer switch?
Interlock
An interlock, is a device that prevents a switch (usually a breaker) from being turned on. In the context of switching between generator and utility power. An interlock is a device that prevents you from supplying a panel from both power sources at the same time.  It's typically a simple, low cost device, that has to be manually operated.

To operate this device, a user would have to:

Turn off the main breaker.
Slide the interlock device up.
Turn on the backfed &quot;generator&quot; breaker.

It may also require the user to turn off some of the breakers in the panel, if the generator is not capable of supplying the entire load. Therefore, interlocks may require additional knowledge and understanding to operate.
Interlock kits tend to be cheap, in comparison to transfer switches.
Transfer switch
A transfer switch (or sometimes transfer panel), is a device (or group of devices) that allows you to switch between two or more power sources.  It can be an automatic, or manual device.  It's similar to a single pole double throw switch, and allows you to select which power source is used.
A two source transfer switch will have three positions:

Utility (Util.)
OFF
Generator (Gen.)

Transfer switches typically require special knowledge to install, but are very easy to operate (sometimes being operated automatically).
Transfer switches tend to be more expensive than interlocks, especially automatic transfers. Though they may make up for the additional costs, in convenience, ease of use, and safety.