By paying off its $1.2 billion federally backed loan seven years early, Chrysler Corp. is buying its freedom and hoping to restore the one thing still missing after its dramatic recovery--its corporate dignity.

What Chairman Lee Iacocca called Chrysler's "Declaration of Independence" is more than just an affirmation of Chrysler's financial health.

"The payback makes more image sense and public relations sense than it does profit sense," said David Healy, auto industry specialist for New York-based Drexel Burnham Lambert.

Iacocca said his company will save $392 million in interest charges by closing out the loans seven years before 1990, when final payment was due.

But Healy and others point out that Chrysler could have invested its planned $800 million lump-sum payment in money-market funds and other securities that would yield a higher return than $392 million over the next seven years.

The basic advantage of paying the money early is that "it gets them from under the board and allows them to go through the front door of the private banks," Healy said, referring to the government's Chrysler Loan Gurantee Board, which administers the loan.

In 1979, when Chrysler lost $1.1 billion and teetered on the brink of bankruptcy, the banks' front doors were closed. The back doors were shuttered, too, until the government agreed to help get them open.

The company's financial reputation was so bad then that when a group of Chrysler staffers came to Washington in 1979 to plead their company's case for financial assistance, they suffered embarassing indignities when they tried to check into a hotel with a Chrysler corporate credit card.

"The hotel people said they were worried about all of the things they were reading about Chrysler in the papers," one of Chrysler's Washington spokesmen, Dick Muller, recalled yesterday. "The hotel wouldn't accept credit. We had to write a check, make a deposit for the guys to get rooms."

Those days are past thanks to the government's help and Iacocca's rapid revision of Chrysler's management. But as one auto analyst pointed out, "even the gold-handled faucets in the executive men's room" are pledged to creditors and there is little dignity in the situation as long as the company has the loan.

Iacocca says he personally finds it intolerable to have to go before the government loan board everytime the company wants to do something important.

For example, last April Chrysler began talking about buying an idle Volkswagen of America Inc. plant in Sterling Heights, Mich. Chrysler wants to invest $160 million in the VW plant to produce a new front-wheel-drive model, identified as the H-car.

Chrysler's board of directors approved the idea last week and under normal circumstances, that would have given the company authority to pursue its objective.

But until Chrysler makes good on its promise to repay $800 million in remaining federally backed debt by Sept. 30, it will need the loan board's blessing to complete the Sterling Heights deal--or any other new projects.

Chrysler officials have spent much time this year huddling with Volkswagen officials in discussion about possible business ventures that go beyond just purchasing the plant.

Chrysler has ridden back to respectability almost exclusively on its fuel efficient front-wheel-drive models called K-cars. Iacocca stretched and dressed the K-car platform in every imaginable way, using it to reintroduce convertibles to the American market then stretching it to copy the Mercedes Benz-look in Chrysler's 1983 E Series models.

His latest variations on the K-car theme are to turn it into minivans--the 1984 Dodge Caravan and Plymouth Voyager--and to work another bit of design magic to produce high-performance cars, the Chrysler Laser and Dodge Daytona.

"All six of our plants in the U.S. and Canada are at capacity," Chrysler Vice Chairman Gerald Greenwald said this week, but industry analysts say Chrysler soon will have to come up with some new models.

Seeking a replacement for its subcompact Omni and Horizon models, which have been in production since 1978, Chrysler reportedly has talked to Peugoet and Mitsubishi about a possible joint-production agreement. But the two companies, which already have business relationships with Chrysler, have shown little interest in a joint-production pact, analysts say.

However, analysts suggest that Volkswagen, which has been having many problems in the U.S. market, could use some of Chrysler's engineering expertise. In return, VW could give Chrysler access--through a temporary joint-production agreement--to some of its European products, analysts say.

Iacocca conceded Wednesday that Chrysler, which had purchased subcompact VW engines between 1978 and 1982, "would like to do more with" the German company and its U.S. subsidiary, Volkswagen of America, Inc. He said he could offer no details on 'more' because the talks are still "pretty much routine."

Conducting such competitively sensitive talks under the public scrutiny of the loan board is extremely difficult.

"Under the terms of the agreement, we have to answer a lot of your questions about what we're doing," Joseph A. Campana, Chrysler's vice president of marketing, told reporters at a Detroit meeting this week.

"I sometimes wonder who we're helping the most--the media or our competitors," Campana said.