"The luggage is in the car."
Grammatically it is correct but it is not natural. If you talk about something, naturally you start with the topic first.
You can use this sequence naturally if it is negative
There is no luggage in the car.
(In the car, talking about luggage, there isn't anything.)
or if you have other information
Although there is luggage in the car, it can't be opened.
(In the car, talking about luggage, although it exists, it can't be opened.)
Although there is luggage in the car, there is nothing else.
(In the car, talking about luggage, although it exists, talking about other things, there isn't anything.)
You're correct in that あります would mean "Luggage exists inside the car," which is how a Japanese person describes where something is. We would use "is" in English, but not in Japanese. One of the hardest things about learning a new language is breaking the habit of looking for analogs and just accepting that people from other countries say things differently.
Why do we have to say "car-of-inside-in" instead of just "car-in" (kuruma-ni)?
I think the に is more like "at" so 車の中 is important for "at the car's inside", instead of just "at the car".
That's how I see it, at least
I'm learning kanji with WaniKani, and I'm wondering, shouldn't this be a valid translation too: 荷物は車内にあります。 ? According to Duolingo, it has to be 車の中、not 車内. Is that just Duolingo being Duolingo, or is there a reason for it?