updated 1/16/2009 2:58:44 PM ET 2009-01-16T19:58:44

The Treasury Department said Friday it will provide a $1.5 billion loan to Chrysler LLC's financing arm to be used for new vehicle loans in hopes of boosting sales and ultimately returning the automaker to profitability.

The Treasury said the new aid will be in addition to the $17.4 billion in loans earmarked for both Chrysler and General Motors Corp. last month in an effort to buy time for the two companies to reorganize.

"This funding will better position us to withstand the current economic challenges until funding becomes available through more traditional commercial sources," Thomas F. Gilman, Chrysler Financial's vice chairman and chief executive, said in a statement.

The first $100 million under the loan is expected to be available next week.

The terms require Chrysler to pay interest at a rate 1 percentage point higher than the one-month the London Interbank Offered Rate for the first year, increasing to 1.5 points above LIBOR for the remainder of the five-year term. At Friday's LIBOR, that's an initial rate of about 1.36 percent.

A special purpose entity created by Chrysler Financial will also issue warrants to Treasury in the form of additional notes in an amount equal to 5 percent of the total size of the loan.

Battered Chrysler saw its sales plunge 53 percent last month, far worse than for GM or Ford Motor Co., and analysts have said it probably won't survive the year as an independent company — despite the $4 billion loan it received from the government. Chrysler had been counting on an additional $3 billion in aid for Chrysler Financial.

The government settled on $1.5 billion after consulting with Chrysler Financial in recent weeks and getting an assessment of the company's financial situation, said a government official who spoke on condition of anonymity because he wasn't authorized to speak publicly about the transaction.

Unlike GM and Ford Motor Co., Auburn Hills, Mich.-based Chrysler is owned by a private equity firm, Cerberus Capital Management LP, and is not required to publicly disclose details of its finances as public corporations are.

GM's financing arm, GMAC LLC, received $5 billion from the Treasury Department in late December. In addition, the Treasury said it would lend up to $1 billion to GM so that the automaker would be able to buy more equity from GMAC.

Chrysler's aid differs from the aid to GMAC, which was an injection of capital into the new bank holding company into which GMAC had transformed itself to become eligible for federal money.

GMAC subsequently loosened its tight lending standards, which had made it more difficult for would-be car buyers to get loans. The move marked the first time that a financial institution said it will use money from the $700 billion bank bailout to offer more affordable credit to consumers.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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