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 2008-2009 Toyota Camry (unintended acceleration), 2000 Ford Explorer (rollovers tied to faulty Firestone tires), and 2005-2007 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.

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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