General Motors Co. will announce on Monday it plans to start repaying a $6.7 billion loan to the U.S. Treasury by year-end due to modest operating improvements, a source knowledgeable about the situation said.

GM , due to unveil its first post-bankruptcy earnings report on Monday, will begin making $1 billion quarterly installments on the loan on December 31. At the same time, the automaker also will start repaying a $1.4 billion loan to Canada at a rate of $200 million per quarter.

GM was not required to make any payments on the U.S. loan before it matured in July 2015, but better-than-expected vehicle sales will let it start repayments much sooner than expected.

The reason GM is in a position to do that is that they have seen performance that has been modestly ahead of what the expectation was when GM went into bankruptcy and emerged from bankruptcy, said the person, who was not authorized to speak publicly about the repayment plan.

GM vehicle sales fell off less than expected during its government-supported bankruptcy in June and July, which lasted only about 39 days. Sales since then, aided partly by government cash for clunkers incentives, have performed ahead of plan.

EARLY EXIT

As a result, GM has not been forced to burn through some $16 billion in taxpayer cash provided to the company when it emerged from bankruptcy. The source said GM has used only about $3 billion of these funds, which are contained in a restricted escrow account that cannot be accessed without Treasury approval.

GM will make its loan payments from the escrow account, the source said, adding that the arrangement resulted from discussions between the Obama administration's auto task force and the GM board.

It is consistent with the U.S. government's focus on exiting the position as early as practicable, the source said.

The government stepped in to bail out both GM and Chrysler Group to save a key portion of the U.S. manufacturing sector from collapse amid the recession.

The $6.7 billion in senior debt is only a small portion of the more than $50 billion in taxpayer funds provided to GM. Much of this was converted to a nearly 61 percent equity stake, making the Treasury GM's largest shareholder. Treasury officials have said they hope to sell shares in a GM initial public offering in the next year.

The source said this would not happen in the first half of the year, so the repayment plan would let GM reduce the loan by at least $3 billion before any plausible IPO.

The repayment schedule also could be altered to accommodate IPO plans or accelerated payments, should conditions warrant.

But the source cautioned that GM's condition was only modestly better than expected and it was not yet ready to repay the full loan amount.

While there are modest improvements which were important and put them in the position to do this, they are at the very beginning of a difficult restructuring and are not in any way out of the woods, the source said.

(Reporting by David Lawder; Editing by Jan Paschal)

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