I've been playing for a while, but I've never managed to get an answer other than "NOOOOOOB" to the question "What does
interp" mean. Does anyone know what interp is? Is it a hack? and if so, why doesn't VAC ban
Interp is short for interpolation, a computer science term (technically math, but that's unrelated).
In Counter-Strike and CS Source the server interpolates based on your previous position your next position. Since the server determines 'where' you are the decision of this calculation determines where you can get hit from. Likewise your client also makes a similar calculation as to where you and other players are. The result is by tweaking the interpolation coefficients you can trick your client into showing the various players in different positions than the server believes them to be.
Since interpolation is a guess, and its effect changes your viewing experience, players often change it for optimal performance. It is possible to change it to cheat, but since interpolation errors occur regardless it is harder to detect. In reality anyone accusing another person of interp is just accusing them of cheating; often an inane accusation.
A longer discussion of interpolation techniques can be found here, however I'll give you a simple example of linear interpolation:
yn=y0+ n * dy / dt
As the acceleration in the y direction may have changed between y0 and yn it is possible this equation produces inaccurate results. To prevent this often times low values of t are used, in CS this is typically .01, though some players set it to .009
Interp means that the hitbox of a player is next to, rather than surrounding the skin of the player, and someone is shooting in thin air and killing the player. This is done by setting the interp console variable very high. This is a sort of hack.
See this video on YouTube for an example.
VAC doesn't ban it because VAC only bans applications injecting into the game, not hacks that involved editing convars.
For a specific discussion about Source's interpolation strategies, check out this page.