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NADA Commissions Report by J.D. Power to Assess Reductions in Trade-In Values Caused by Preventing Sale of Used Vehicles with Open Recalls
McLEAN, VA (Nov. 19, 2015)-The National Automobile Dealers Association (NADA) today announced a report that it commissioned from J.D. Power showing that many consumers could see the value of their vehicle trade-ins decline by an average of $1,210 - and by as much as $5,713 - if auto dealers were prohibited from selling any used vehicles with open recalls.
The J.D. Power study, entitled "An Economic Assessment of Trade-In Value Reduction Caused by Preventing Auto Dealers from Selling Passenger Vehicles with any Open Recall," concluded that the enactment of legislation - including the "Used Car Safety Recall Repair Act," proposed by Sen. Richard Blumenthal (D-Conn.) - requiring auto dealers to fix all outstanding safety recalls before selling or leasing any used passenger motor vehicle could have an adverse impact on the value of those trade-ins.
Each year, approximately 10 million vehicles are traded-in to franchised dealers, and in virtually all of these transactions, the trade-in manager at the dealership uses a combination of electronic analytic tools and physical inspections to decide how much of a "trade-in allowance" to offer the consumer. This trade-in allowance is an important part of the overall transaction because, typically, the consumer uses it to fund the down payment needed to finance the purchase or lease.
But if the dealer is restricted from reselling a recalled vehicle, either at retail or at wholesale, until that recall was remedied, J.D. Power identified a number of costs that would be incurred during the grounding period that could negatively impact the trade-in allowance offered. While there are additional factors to consider regarding reselling a recalled vehicle, J.D. Power's analysis was related only to the additional expenses of: the cost of financing the vehicle purchased from the consumer, the cost of storing the vehicle, the cost of insuring the vehicle, and depreciation costs.
Furthermore, while $1,210 represents the weighted average for both in-brand trade-ins (for illustration a Honda traded to a Honda dealer) and out-of-brand trade-ins (a Honda traded to a Ford dealer), the costs are higher for out-of-brand trade-ins because out-of-brand dealers incur additional costs when holding the vehicle during the repair delay and when transporting the vehicle to an in-brand dealer for repair, the report states.
According to government and industry data collected for the study, repair delays resulting from the challenges faced in engineering, producing, and distributing the replacement parts needed to address recalls are both real and significant.
Also significant is the fact that dealers will not know in advance how long a recall delay will last, and thus must estimate the delay, which could further exacerbate the trade-in value reductions that consumers will face.
"Assuming a repair delay that is shorter than the actual repair delay is a risky proposition for a dealer, and thus they are more likely to act as if they believe the range of repair delays will be on the high end of the range of repair delays observed in the past for recalls of similar scale and complexity," explained Jonathan Banks, executive analyst at the Used Car Guide division of J.D. Power, and the report's lead author. "In a hypothetical scenario, a lack of clear information could reduce the trade-in value offered to a consumer by hundreds of dollars if a trade-in manager were to overestimate a 30-day recall delay by an additional 30 days."