Carvana: Is it worth it? Or is there a catch?

You’ve seen those massive Carvana tower-slash-car vending machines, right? Looming over the interstate, bathed in blue neon like a cyberpunk parking deck.

Picking up a car from a massive vending machine by inserting a giant coin is a pretty wild concept. 

That said, so much about Carvana seems hard to believe. The company was bankrolled by a convicted felon and founded by his son. They erected 24 wildly expensive car vending machines inside major cities, and despite a floundering IPO, has still managed to survive, competing with established juggernaut CarMax. 

So what is Carvana? How does it work? And should you buy a car from them?

Well, there’s a lot to dissect here. In short, there’s a few things you should know about this company before deciding to give them your patronage. 

Before we discuss anything else, there’s an elephant in the room the size of a car vending machine that we need to address:

Is Carvana going out of business?

I mean, recent headlines sure aren’t painting a rosy picture:

Indeed, Carvana is having a tough time in 2022.

Its stock has crashed 95% (wait… 96%), its VP is being charged with 80 crimes and offenses, and the state of Michigan has temporarily barred Carvana from selling cars there, citing the company’s “imminent harm to the public.”

It’s quite the jarring fall from grace, considering Carvana’s total sales nearly doubled during the pandemic.

So what the heck happened to Carvana? And if you’re thinking of buying a car from them, how does this affect you?

Will Carvana have a “going out of business sale” on used cars? Or does buying a car from a sickly company come with huge hidden risks?

Let’s investigate Carvana (pun intended).

How Carvana’s best year revealed a broken business model

Carvana’s business model, in a nutshell, is to do things better than Carmax. To get there, Carvana does everything in-house: photos, inspections, maintenance, deliveries, even lending its own money to people who want to finance their cars.

Toss in 34 sweet car vending machines and you can see how Carvana burns through cash quickly. As a result, the company didn’t turn a profit until 2021 — nearly 10 years after its founding.

Granted, that’s not uncommon. It took Tesla 17 years to earn two nickels to rub together.

But Carvana’s problem wasn’t becoming profitable — it was staying profitable. Somehow, despite selling 117,564 cars in Q2 2022, Carvana still posted a $439 million loss.

This made investors wonder: if Carvana can’t turn a profit at the best of times, maybe this whole model just doesn’t work.

So they bailed on the stock and sent it crashing. And that marked the start of Carvana’s terrible, horrible, no good, very bad 2022.

Carvana’s legal troubles

Carvana has a nasty habit of not sending customers the titles to their car. And without your title, you can’t legally drive your new car.

When enough customers complained about this, Carvana saw its dealer license suspended in North Carolina, Florida, Michigan, and Illinois.

And while Florida and North Carolina eventually let Carvana out of the doghouse, the State Department of Michigan kept digging and found signs of systemic shadiness, including:

• Missing vehicle titles and other critical records
• Fraud
• Destroyed documents
• Failing to maintain odometer records
• Improperly issuing temporary registrations

And more.

As a result, Carvana still can’t sell cars in Michigan. The company tried filing a restraining order against Michigan Secretary of State Jocelyn Benson, but a judge overruled it.

In Illinois, state officials decided Carvana could keep selling cars — but its VP would face 80 charges. In response, Carvana asked its Illinois customers — including those who complained — to sign a petition protecting the company from these “antiquated paperwork and legal requirements.”

All told, Carvana’s failing public image, uphill legal battles, and questionable customer outreach aren’t doing much to extend faith in the company’s longevity.

So will it survive?

Will Carvana go bankrupt?

It’s not looking good. Forbes thinks Carvana stock will go to $0. Yahoo Finance calls it “one of the worst stocks to own.”

“Talk about a crash and burn,” writes Steven Cress in Seeking Alpha.

Even if Carvana survives 2022, 2023 will be way worse. Carvana paid too much for trade-ins during the pandemic, and now that the used car bubble has burst, it’ll be forced to sell a big chunk of its inventory at a loss.

And if Carvana’s business model couldn’t turn a profit at the absolute best of times, how is it going to weather the worst of times?

What does this mean for potential Carvana customers?

It means stay away.

Let’s not forget the original source of Carvana’s current legal woes: customer complaints about missing titles. Without a title, you cannot legally drive your new car — and some Carvana customers have waited 11 months and counting for theirs to arrive.

Let’s also not forget that Carvana seems to be actively fighting against consumer protection laws — and trying to manipulate its customers into joining the company’s side, not the side of the regulators who are trying to protect them.

And I wish I could say this kind of moral grotesquery was out of character for Carvana, but my research seems to indicate otherwise (see “charity theater” below).

The bottom line is this: Carvana’s financial and legal troubles are not creating a buying opportunity. There’s no “fire sale” here: just a risk that you’ll never receive your title, meaning you’ll pay $50k for a two-ton paperweight you can’t legally drive.

But how did Carvana get to this point? Was it rotten from the start? And if it turns things around in 2023, would it be worth considering?

Carvana was founded by three young tech entrepreneurs in 2012: Ernest Garcia III, Ryan Keeton, and Ben Huston.

Garcia III, a Stanford grad and billionaire, pioneered the project with his father, the founder of DriveTime. Garcia II was convicted of fraud in 1990 for his involvement in the Charles Keating scandal, but that didn’t stop him from rebounding and building an empire on used car sales and subprime auto loans.

The young founders sought to create an alternative to the traditional dealership model, proudly wearing the slogan “Skip the Dealership.” To peel consumers away from the incumbent method, Carvana aimed to offer higher quality pre-owned cars for lower, no-haggle prices.

Though noble, their model wasn’t exactly unique. When I interviewed one of the founders in 2015, I asked him what separated Carvana from CarMax. His answer? Convenience.

“You can buy everything else online and have it delivered; why not a car?”

CarMax has since evolved to offer at-home delivery, but having purchased cars through both services for clients, I can say that Carvana is leagues more convenient.

To generate buzz, Carvana built the first “car vending machine” in 2013, and in 2017, the company went public.

Like Tesla and Uber, Carvana is bleeding cash but is propped up by stockholders, funding, and generally speaking, some pretty happy customers. So what makes Carvana appealing to car shoppers? How does it all work?

Head to Carvana’s calming, blue-themed homepage and you’ll see lots of buttons and options, but their offerings essentially boil down into three services: shopping, financing, and selling your old car.

Shop for used cars

Carvana’s bread and butter is selling used cars. Currently, they have over 29,000 cars in stock, and their offerings tend to be under 10 years old and between $10,000 and $50,000 in price.

Unlike CarMax, Carvana seems to focus on selling cars that people under 40 can afford. That isn’t surprising, given their goal of defeating dealers (something Millennials hate) with technology and convenience (something Millennials love).

Since they know you can’t really see the car before you buy it, Carvana’s listings go into extreme detail. You can see dozens of photos, specs, and more, plus the results of Carvana’s 150-point inspection process. I also like how they point out the flaws they found in pictures.

Just like Amazon, Carvana shows you a timer for how quickly you need to order the car for it to arrive one day sooner.

Interestingly, if you click on a car that another customer has started the paperwork for, you’ll see this:

Lastly, it’s worth pointing out that Carvana offers one of the best search features I’ve seen online. Everything is crisp, simple, and easy to use.

Hilariously, Carvana will also ask you to make sure you want a car with a manual transmission. There’s a “Millennials can’t drive stick” joke in here somewhere.

When you’re ready to buy a car, you’ll click GET STARTED. Then, you’ll head to the purchase dashboard.

I love how Carvana breaks down the necessary steps of purchasing a car into simple sections with completion time estimates. Add ‘em up, and you can purchase a new car in 18 minutes or less. I got through most of the process in under 10.

You’ll also be able to choose whether you want the car delivered at home or awaiting pickup at the vending machine (with a commemorative coin).

I’d pick the vending machine every time.

Once you take delivery of your car you have seven days to return it, no questions asked. CarMax and even many dealerships offer the same return policy these days, but they won’t always come to pick it up from your house as Carvana will.

The effortlessly smooth process of buying a car is probably Carvana’s shining strength. If you know exactly what you want, you can buy a car through Carvana in minutes, compared to hours at CarMax or a dealership.

Finance your purchase

Next up is the option to finance your car. You can get pre-qualified in under two minutes without a hard credit check.

Once you’re pre-qualified, Carvana will automatically calculate your loan rate for each car you look at.

Two things worth noting here. First, Carvana never charges dealer fees. The implication is that dealer fees are BS, but they’re actually not; it costs hundreds of dollars to file paperwork and register the car with the DMV. So your dealer isn’t necessarily ripping you off — Carvana is just doing you a solid.

Second, you’ll notice that Carvana offered me a 3.9% APR. I have excellent credit, but Carvana doesn’t know that yet, so I expect that rate to improve a bit when they do a hard credit check later.

Don’t expect to see 0% APR from Carvana. That’s an old dealership trick, and in most cases, it’s because they’re ripping you off with an inflated sticker price. Carvana doesn’t pull such shenanigans, which is commendable.

Sell or trade in your old car

Finally, Carvana will let you quickly and conveniently grab a quote on your old car. Just for fun, I asked them what they think my 2001 Miata is worth.

After you submit your plate number, Carvana will ask you to confirm your car’s color, trim, and more:

Then, it’ll ask you to self-report the state of the car. I was honest; the car was in an accident last year (I was hit by a limousine, of all things), and, being a 21-year-old car, it had an existing ding or two.

In the end, Carvana offered me a $2,911 trade-in value for my Miata.

This was way more than the downright insulting $432 Carvana offered me last year but still falls well below KBB’s estimated trade-in value of $4,273.

It’s also roughly half of what I could get on the private market:

In the end, Carvana’s trade-in values — which were laughably bad a few years ago when I tested multiple cars — have greatly improved.

They’re still pretty chintzy, so be sure to get multiple trade-in offers before settling.

You can buy a car in minutes

Carvana’s website is a masterclass in design. Most B2C sites can learn a thing or two from Carvana’s search functionality, individual listings, and superb UI.

Here’s a list of things you can accomplish on Carvana.com in under five minutes each:

• Find your ideal car
• Purchase a new car
• Get a financing offer
• Get a trade-in value

At a dealership or CarMax, each of these tasks could take 30 minutes.

Below-average prices

Carvana tends to undercut dealers and even CarMax by a couple of hundred bucks.

The reason they can get away with it, presumably, is low overhead: Carvana has only 34 locations and 21,000 employees compared to CarMax’s 238 and 26,889, respectively.

(Relatively) good customer service

I’ve read a few scattered horror stories of Carvana customers experiencing delivery delays, getting cars in surprisingly awful shape, and more. But to their credit, Carvana always seems to remedy the issue eventually or just take back the car for a refund.

Most of Carvana’s BBB complaints seem to come from customers who discovered major issues after the seven-day return window, claiming that Carvana should own the mistake since it passed their “150-point inspection.”

The truth is that all “150-point inspections” are bogus and should never be trusted. You should always, always get a pre-purchase inspection within a car’s return window.

But all things considered, Carvana’s customer service seems significantly more caring than the average car dealership, so there’s that.

Good financing options

Carvana can pre-qualify you for financing in under two minutes with a soft credit check, and its terms are pretty generous. With a dummy profile making $50k a year, I was able to secure around 3.9% APR, which is pretty good.

That said, you should always collect multiple financing quotes when making a big purchase. In the section ‘Alternatives to Carvana’ below, I’ll share some other places to get quotes.

No-hassle return policy and 100-day warranty

Every Carvana car comes with a seven-day, no-hassle return policy. Just schedule a pickup by 5pm, provide some notes, and they’ll come haul it away.

CarMax and some dealers offer a similar return policy, but you’ll typically have to take it to them (and the latter group will put up more resistance).

Cars also come with a 100-day/4,189-mile limited warranty, whichever comes first (don’t ask me how they picked that mileage). So if your pre-purchase inspection reveals any mechanical or electrical issues — but you don’t want to return the car — you can file a warranty claim and have it fixed at a nearby “Carvana Preferred Facility.”

Chintzy trade-in offers

Carvana is still pretty miserly when it comes to trade-in offers, which is probably how they’re able to resell cars so affordably. So be sure to collect multiple trade-in offers from dealers and CarMax, and consider selling your car to a private party for even more cash.

The cars aren’t always in good condition

Carvana would have you believe that 100% of their cars are in excellent condition. Each one supposedly meets the rigorous standards set by the Carvana Certified Program, having passed a 150-point inspection, with no reported accidents or frame damage.

Well, a true pre-purchase inspection by a trustworthy mechanic takes up to two hours. I’d guess Carvana spends around 10 minutes kicking the tires — a theory that an alleged former Carvana employee confirmed on TikTok.

As a result of Carvana’s alleged lack of quality control, Carvana customers often receive cars with surprise scratches, hidden rust, and even missing suspension components.

I can’t pick on Carvana too much for this though, since every used car dealer promises a totally baloney “150-point inspection.” Just be sure to get your own inspection from a trusted mechanic within the seven-day return window.

You can’t perform test drives

Test drives are like going on dates with cars. You can’t just pick one from a perfect-looking profile; you need to make sure there’s an in-person connection.

Being online-only, Carvana doesn’t offer test drives. They say they do; they even brag about how their “test drive” is seven days long. What they conveniently forget to mention, however, is that you have to buy the car first.

Carvana engages in “charity theater” and siphons credit from employees

Despite being run by two billionaires and generating $12.8 billion in 2021 revenue, Carvana doesn’t seem to do any measurable charity or philanthropic work. Worse still, the company consistently takes credit for its employees’ charitable efforts without making any contribution of its own.

The Carvana Carpool program, for example, seems to exist solely to give the illusion of greater charity. Supposedly, for every referral they receive, Carvana puts $100 towards donating a car to an individual in need. However, despite selling over 600,000 cars a year, Carvana has only donated a handful of cars since 2017.

Carvana also loves taking credit for its employees’ efforts. When Mesa, AZ-based employees pooled their own money to buy a former Marine a car, Carvana donated nothing — but didn’t miss an opportunity to produce a self-promotional video.

A month later, when Carvana’s talent acquisition team raised $4,000 for the autism work program Pathway to Work, Carvana didn’t match it. And when the director of the Pathway to Work heavily implied how desperate they were for an additional work vehicle, Carvana recorded her plea and didn’t give her one.

In stark contrast, The CarMax Foundation has donated $75 million since 2003. The difference in the two companies’ attitudes toward charity work is enough to make you wonder:

For buying: CarMax

I have 10 years of experience with CarMax, and only once have they disappointed me. In 2017 they tried to sell my client a Lexus RX with rusty control arms, and I gave them hell about it (again, 150-point inspections are total baloney).

The rest of my experiences have been resoundingly positive. CarMax may not always be able to compete with Carvana on bottom-line price, but they back up every sale with strong customer service. Plus, they open their lot like a library; you can spend as much time as you’d like checking out cars, test driving them, and more, with no pressure from the accompanying sales associate.

I’m hard to please when it comes to car sales, and CarMax has earned my decade-long patronage. Plus, it’s nice knowing that a percentage of the business I bring them goes to improving the world through the CarMax Foundation.

For financing: Consumers Credit Union (and a Few Others)

Carvana offers pretty good rates on auto financing but they’re not the only ones.

Consumers Credit Union is our top choice overall for auto loans, thanks to some of the lowest APRs in the business (3.99% for used cars and 3.74% for new), flexible term options, and solid customer service.

I never thought I’d have such conflicted feelings about a used car website.

On one hand, Carvana offers the easiest way to purchase a car in the world, period. You can buy a car online in as little as 10 minutes and have it arrive on a flatbed outside your house in a few days.

Plus, Carvana is a little cheaper than CarMax, offers easy financing options, and carries a solid record for customer service.

On the other hand, however, Carvana gives bafflingly low trade-in offers, provides no way to test or inspect a car before purchase, and is Scrooge McDuck-levels of greedy.

Miserly as they are efficient, Carvana may deserve your business if they offer you a truly amazing deal. Otherwise, you might want to take your business to CarMax. There, you’ll be able to see the car, test drive it, and finance it onsite.