Would you lend ?10,000 to someone you'd never met?

It's being touted as the eBay of the banking world - a radical new online financial "exchange" that allows millions of ordinary people to borrow from and lend money to each other. Zopa, which was launched this week, claims it can offer many borrowers and investors better rates of interest than they can get from banks and building societies.

It aims to cut "faceless corporations" out of the equation by putting people who want to lend money in touch with those who want to borrow.

Zopa (it stands for "zone of possible agreement" and can be found at zopa.com) isn't a bank, which means it doesn't need a banking licence. However, it does have some bank-like traits.

This week, rates for borrowing money on Zopa were running at between 5% and 9%, while the company reckons lenders should be able to make a return of 6% to 7% a year.

Zopa is undoubtedly different, and it already has several thousand members. But is this "Bank of Joe Bloggs" a little bit too out there for mainstream punters? Here we answer some of the questions that people are asking.

What is Zopa?

A privately owned company, it describes itself as "the world's first lending and borrowing exchange".

Who's behind it?

Zopa's credentials are impressive. It's been founded by the creators of online bank Egg, is financed by the venture capital company that backed eBay in its early days, and has won the blessing of well-known business people including Carphone Warehouse founder Charles Dunstone and Simon Woodroffe, the man behind the Yo! Sushi restaurant chain.

Who can use it?

Zopa is open to UK residents over 18 years old with a current account. But while pretty much anyone is welcome to lend money, at the moment it is only open to borrowers it believes will be a low risk for lenders. It estimates that 50%-60% of the population won't have a credit rating good enough to allow them to borrow.

How does it work?

That depends on whether you're looking to borrow or lend money.

I'm interested in borrowing.

Before you can lend or borrow, you need to become a Zopa member (this doesn't cost anything). Borrowers register and have their credit records checked by Equifax. Provided you're accepted, you are assigned to a "market" which will depend on your credit rating (either Market A or Market B - Market A contains the most creditworthy borrowers) and the term of the loan (12 or 24 months). There, you can apply for a loan at the rates available to you.

As with traditional lenders, the higher the risk you as a borrower represent, the higher the rates of interest will be. Zopa is a "live" market and the rates will constantly vary depending on the lenders in that market.

How much can I borrow?

The minimum loan is £2,000, and the maximum you can borrow will be your individual credit limit (maximum £15,000). Zopa makes its money by charging borrowers a 1% fee.

How are repayments calculated?

Your total amount repayable is the total amount you've borrowed. It includes the loan amount, Zopa's fee, and the total interest you would pay if you repaid the loan over the agreed term. You make monthly repayments. However, you can pay off the outstanding amount on your loan at any time without penalty.

Are the rates better than I can get from a traditional lender?

It says borrowers "should expect to get rates as good as or better than the best rates available on the high street". This week, interest rates were running at between 5% and 9%, depending on your credit rating and the term of the loan.

However, Alliance & Leicester, Direct Line and Churchill are offering unsecured personal loan rates as low as 5.9% APR, according to data provider Moneyfacts. "It's hard to see who really benefits from using this service," says Richard Mason at price comparison website moneysupermarket.com

Can I choose who I borrow from - and will I know who they are?

No, you can't choose. Your loan will be made up of money from several different people. You'll be able to see the names of your lenders but you won't get any of their contact details such as addresses.

I might be interested in lending money. What's in it for me?

Zopa says lenders should make a 6%-7% return per year if they relend all the money repaid to them (an average "bad debt" rate of 4% is already taken into account), which it says is 1%-2% higher than the current best savings account rate. However, a quick look at Moneyfacts (go to moneyfacts.co.uk) shows there is no shortage of savings accounts paying more than 5%, with some regular savings accounts paying as much as 7%. Some may feel Zopa isn't offering a good enough return to make it worthwhile, bearing in mind the risks.

What's the procedure?

You can lend up to £25,000 (there's no fee to pay). You pick a market, depending on the level of risk you're happy to take. You choose the length of time you want to lend their money for and set the interest rate you're happy to accept.

Zopa says the cash you lend is split between at least 50 different borrowers, and your exposure to any one borrower is capped at £200, which means the risk is well and truly spread. You'll receive monthly returns that you can relend or transfer to your current account.

But Zopa says "a small number" of borrowers may never fully repay their loans. Therefore it doesn't guarantee a level of return that you'll enjoy.

Give me an example.

If you lent £1,000 for one year at 6% (and assume everyone pays back), your total interest would be £31.92, not £60. That's because your borrowers do not borrow the full £1,000 for one year, so do not pay interest on the entire amount for that period. After six months you would have received back more than £500, but then you can relend the money and earn interest again.

Is it safe?

Zopa insists it is very safe - it is regulated by the Office of Fair Trading and the Financial Services Authority - and boasts high levels of online security and fraud protection, but concedes that as a new company, it has "a chance of failure".

Zopa members aren't covered by the official banking industry safety net scheme which provides compensation of up to £31,700 (100% of the first £2,000 and 90% of the next £33,000) if a financial institution fails.

Janice Allen at the National Consumer Council says that while it sounds attractive, it's unknown territory. "It's a leap in the dark for everybody, whether you're a lender or a borrower. And there is no track record for people to look at."

So it's not really like a bank at all?

In some respects Zopa isn't very different from the banks. Like them, it will earn commission by selling borrowers its (optional) payment protection insurance, which covers customers who are unable to keep up payments on their loans if they are made redundant or fall sick. If a borrower misses a repayment and doesn't contact Zopa first, it may hit them with a £20 fee. And if an individual fails to pay back their loan, Zopa will "get tough" and use exactly the same recovery processes that the banks use. If it doesn't recover the money, it will call in a debt collection agency.