RAW, Cloaking is that mind trick, but Invisibility is a real optical effect.
That's how I always played the spells. Invisibility is an 'E' spell, like most illusionist spells: it really alters the physical world. Cloaking, and most of the spells from the frankly broken Enchanter profession, are (quite powerful) mind altering effects.
Additionally, Invisibility spells are not resisted. Cloaking spells are (OK, with a -50 modifier, the chances to resist are quite low, but still). On the other hand, Cloaking has no such things as fringe effect (because it does not alter the physical world), while Invisbility does.
Cloaking is extremely efficient on a scene with few targets and when you don't have to move too much (no target change). Invisibility will last much longer if you have to move or if people pass you by, but the risk of discovery is higher.
As a side note, we ruled that Invisibility only works in the visible part of the spectrum - it does not protect against longer or shorter wavelength perceptions. Otherwise, scientific minds could extend Invisibility to cover the full spectrum - microwaves, radar, x-rays, you name it. Push it a bit further, and it logically makes you immune to some radiation effects and almost all kinds of direct photon-based heat effects. It's a bit too much, and also a bit too far from the common interpretation. But it's better not to think too much about the science behind it (just like many other magical effects, such as the enlarge and reduce effects).
