Recalls have little or no effect on residual values, study shows

Article by Christian A., on August 26, 2014

For this year, lenders should have a high number of recalled cars and light trucks in their portfolios of auto loans and leases. A study by Black Book Lender Solutions says that callbacks have almost no effect on depreciation rates of vehicles. The study also found that widespread recalls had little to no effect on residual values.

Black Book said in the study that historical data trends have shown that recalls usually do not adversely impact normal retention patterns of a vehicle. Lenders use expected residual values to determine how much a leased vehicle will be valued when the lease ends.

Residual values also play a role when a lender repossesses a vehicle and resells it at auction. Black Book has reviewed some of the popular recalls in recent history, including the 2008 to 2009 model years Toyota Camry (unintended acceleration), 2000 Ford Explorer (rollovers tied to faulty Firestone tires), and 2005 to 2007 model years Chevrolet Cobalts (ignition switch recall).

According to the study, residual values of 2005-2007 Cobalt were relatively unaffected by widespread recalls that GM issued in February and March. On the other hand, Black Book discovered that value of the 2005-2006 Cobalt even surged 1 percent in the first six months of 2014.

Toyota Motor Sales USA Inc., meanwhile, saw a slump in sales during the unintended-acceleration recall of the 2008-2009 Camry. However, the vehicles depreciated at a slower rate than the average for the segment.

In 2009 to 2010, Toyota issued three separate but related recalls of its vehicles, the first two with the assistance of the National Highway Traffic Safety Administration (NHTSA). The first recall was issued on November 2, 2009, to correct a possible incursion of an incorrect or out-of-place floor mat into the foot pedal well. The second recall was initiated on January 21, 2010 due to a possible mechanical sticking of the accelerator pedal (Sticking Accelerator Pedal).

As of January 28, 2010, Toyota had issued recalls of around 5.2 million vehicles for the pedal entrapment/floor mat problem, and another 2.3 million vehicles for the accelerator pedal problem. In January 29, 2010, the recall was widened to include 1.8 million vehicles in Europe and 75,000 units in China. Total number of cars recalled by Toyota globally reached 9 million units by then.

Larry Dixon, a senior manager of market intelligence at NADA Used Car Guides, remarked that Toyota’s reputation as carmaker that build quality and reliable vehicles buyers worked against the Japanese company, since consumers with high expectations were disappointed by the recall.

He noted that a carmaker that doesn’t have such sterling reputation would see recalls having less impact on used-vehicle prices.

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