The only user difference I'm aware of is that version 2.0.5 can turn off the European Union Volume Restriction, which earlier versions cannot do. Any other differences are internal, due to the hardware. If the iPod you have bought is on 2.0.4, then that's where it will stay.
I'm not aware of how those differences affect the sound of the music from the iPod, and Apple is unlikely acknowledge "poor hardware". Frankly, that expression is speculation by who knows who. In order to specifically confirm "poor hardware", you would need to speak with the person who has determined that as a fact, and ask for their specific and convincing reasons for such a claim. Otherwise, you're simply repeating what that person says they were told by their best friend's mate's sister's uncle-in-law! Reading the same thing as an online post is no different - it's not proof.
A1286 wrote:
Can anyone confirm that the newer iPod Classic 7G produced after 2012/2013, has poor hardware and because of that could be updated to 2.0.5. firmware/software...
It is not possible to update from 2.0.4 to 2.0.5, regardless of any "poor hardware". The difference is due to hardware. Since the hardware cannot be changed, then neither can the software.
You've obviously taken a specific decision to buy an iPod Classic secondhand as Apple have stopped making and selling them. So without the seller's detailed description of the iPod, it's difficult to know in advance precisely what you have bought. For example, if the iPod was originally purchased inside the EU and it has version 2.0.4, then it will come with the Volume Restriction, which cannot be overridden. But it if was purchasedoutside the EU, then it would not have the Volume Restriction installed.
Since you have committed yourself to this purchase, presumably by now, it has arrived. If it hasn't, there appears to be little you can do until it does.
Once you have the iPod, go into Settings/About and look for the version number listed, probably on the third screen.