Apparently upgrading the Archos is not that easy because there are several fine connectors that are very easily damaged. But is possible if you are comfortable with this sort of work. The next issue is that a bigger drive is likely to get hotter and consume more battery - don't think there are any low power drives you can use because of the size required 2.5" SATA and the thickness needed to fit limits the choices. You should read this first
Forum.ArchosFans.com • View topic - Any possiblility to change Archos 70 250GB to 40or 80GB SSD?
An external drive works with the right USB Host Connector - it is just seen as external storage. You must have a lot of music to want more than 250GB in your car - even using flac. If space is an issue can you not use MP3 because at the end of the day you can only use the headphone out socket so quality is limited by that. Apparently there have been a lot of requests on the android forums to enable USB audio out which would be a great improvement but it is not there yet.
Poweramp and Gonemad are android apps - you just need to go in and set them up properly as I found I had issues with dropouts until I set the buffers large enough and how it managed its sleep settings.