Aircraft in Iceland are like buses or trains elsewhere - they're the main form of internal travel other than the roads. Be warned though, that the ride can be a bit bumpy if you're entering one of the fjords like Akureyri.
Scheduled service to nearby destinations, including Greenland and Faroe Islands, is provided by Air Iceland and Atlantic Airways.
A car offers the most flexibility for travel around Iceland. Numerous agencies rent vehicles, and ferries allow individuals to bring their own car with them. Rental prices are high - expect to pay at least ISK4000 per day for a two wheel drive vehicle, and upwards of ISK12,000 per day for a four-wheel drive vehicle; these prices include basic car insurance, but additional insurance may be purchased to protect against damage from gravel or other common mishaps. Read the fine-print however, because the things that usually break (windshield, tires, bottom of the car) are usually excluded. Travelers can see the majority of Iceland's sights with a two-wheel drive vehicle, but those interested in venturing into the interior or to places such as Landmannalaugar will need four-wheel drive - and long experience at the wheel - as roads are rough and rivers may need to be crossed. In some locations it's best not to travel alone due to the difficult terrain and weather conditions. Be aware that renting a four wheel drive vehicle may require reservations made several months in advance as these vehicles are in high demand. In addition, renting cars on-location is almost never cheaper than doing so in advance, and car rentals, including at the airport, are not open around the clock.
Driving in Iceland is on the right side of the road. Headlights and seat belts for all passengers must be on at all times. There is one main highway, Route 1-Ring Road, that encircles the country.
Gas can generally be obtained 24 hours at self-service stations using a charge or credit card, but you will need a personal identification number for that card. Alternatively, most stations sell prepaid cards that can be used to buy gas after-hours. If traveling around the country, the gas tank should be kept near full because stations can be 100-200 km (62 to 124 mi) apart. Petrol costs (as of summer 2011) are around ISK240 per litre. Because of Iceland's ever-changing weather, one should keep extra food and know where guesthouses/hotels are located in case of a road closure.
Most mountain roads are closed until the end of June, or even longer because of wet and muddy conditions which make them totally impassable. When these roads are opened for traffic many of them can only be negotiated by four wheel drive vehicles. The roads requiring four wheel drive (and possibly snow tires) are route numbers with an "F" prefix, e.g. F128. The general speed limit on Icelandic rural roads is 90 km/h on paved surface and 80 km/h on gravel, in urban areas the general speed limit is 50 km/h. There are some exceptions from the general limits that are specifically signed as such (the limit is never higher than 90 though) but be aware that the general speed limit is usually not indicated by signs. Speed cameras are posted around the country, and fines can easily reach ISK 50,000 - 130,000. The DUI limit is 0.05%, with a minimum fine of ISK 70,000 - don't drink and drive.
Drivers in Iceland should familiarize themselves with road signs and be prepared for Iceland's unique driving conditions. The roads in Iceland are of a high quality, typically made from slightly rough black basalt. Crossing rivers can be very dangerous, particularly if it has been raining, and should be done with great caution. Driving on gravel can be a challenge, and loss of control on cliff-side roads can easily be fatal. There are two signs in particular that foreigners should pay attention to. First, "malbik endar" means that the road changes from a paved road to a gravel road. Slow down before these changes, for one can lose control easily. Also "einbreið brú" means that a one-lane bridge is approaching. Arrive at the bridge slowly and assess the situation. If another car has arrived at the bridge first allow them the right of way.
If you are traveling by road a great site to check is the Iceland Meteorological Office who have an excellent set of pages including the Icelandic Road Administration on all of the main roads.
There are no road tolls on Icelandic roads, except from the Hvalfjardargong tunnel located approx. 30km north of Reykjavik. For vehicles up to 6 metres, the price is ISK 900, 6-8 metre vehicles pay ISK 1200 and drivers of larger vehicles than 8 metres pay ISK 2300.
BSI is the long-distance bus station in Reykjavik from where you can take scheduled buses on various companies, including Iceland Excursions, Trex, Sterna, SBK (for Reykjanesbær). Be advised that long distance bus travel in Iceland is quite expensive, sometimes more expensive than flying. Besides, very few routes are served more than once a day, which means same day connections are rarely possible. For example, it is impossible to reach Reykjavik from Seyðisfjörður in one day by bus, besides on a few summer days, when there is an afternoon service from Akureyri to Reykjavik.
Special offers include 1-4 week unlimited bus travel round the Ring Road (optionally with travel round the West Fjords); one time-unlimited breakable journey around the Ring Road in either direction. Some tours to the interior, in special 4x4 buses, are a much cheaper and more relaxing alternative to driving and serve most major locations (e.g. Landmannalaugar, Thorsmork, Aksja etc). Tours to the interior are only scheduled for the summer months.
Some of the largest day tours and sightseeing companies include Iceland Excursions - Gray Line Iceland, Icelandic Travel Market They operate tours all year round and bus routes all over the West, South and East part of the country. NetBus offers only a few itineraries but is considerably cheaper than the rest, especially for a Blue Lagoon tour.
SBA-Nordurleid operates routes all over the North and East of Iceland.
A Golden Circle tour is available from Reykjavík which will take you round the Gulfoss waterfall, geysers, the crater and the Mid-Atlantic rift/place of Iceland's first Parliament. Although you don't get much time at each stop the guide will tell you about Iceland's history and some general information.
Regrettably, the capital area bus system, run by Strætó bs is an inefficient and expensive mess that can not be relied on. Currently, a single fare costs 350 ISK (slightly over $3), though one and three day passes are available for 700 ISK ($6) and 1,700 ISK ($15) respectively. Unlike in many other countries, bus drivers do not give back change, so if all you have on you is a 500 Kr. bill, do not expect to get the difference back. You can also buy a set of eleven tickets for 3,000 ISK from major bus stops (also from the driver). Once you have paid to the driver, you will not get a ticket, unless you ask for one. If you get a ticket, it is valid for any other buses you take within 75 minutes.
All buses stop running at 11:00 PM, with many stopping earlier, some as early as 6:00 PM. Buses start running around noon on Sundays! Fares to zones 2, 3, and 4 (extending all the way to Akranes and Selfoss) are higher, although all of Reykjavik, Garðabær, Hafnarfjörður, Mosfellsbær, Álftanes and Seltjarnarnes fall within zone one, where the regular fare of 350 ISK is valid.
Cycling is a good way to experience Iceland, and provides a very different experience to other means of transport. You should bring your own touring bike, as buying a bike locally can be expensive. Traffic in and out of Reykjavík is heavy, otherwise, it's OK. You can cycle safely on the Ring Road, or take the bike on the buses (which are equipped with bicycle racks) serving the Ring Road and do side trips. However, if going self-supported, considering the weather and conditions, it is strongly advisable to have a previous touring experience.
Hitchhiking is a cheap way of getting around in Iceland. The country is among the safest in the world, people are quite friendly and the percentage of drivers who do give rides is high, especially in the off-season. However, low traffic in areas outside Reykjavik makes hitchhiking in Iceland an endurance challenge. Even on the main ring-road the frequency of cars is often less than one car per hour in the east. Nearly everybody speaks English and most drivers are interested in conversations.
Avoid hitching after nightfall, especially on Friday and Saturday night. Alcohol consumption is high and alcohol-related accidents are not uncommon.
Hitchhiking into the interior is tough, but everything works if you have enough time - calculating in days, not in hours. For longer distances or less touristic areas be prepared with some food, water and a tent or similar. The weather can be awful and sometimes spoils the fun of this way of travelling.
The HitchWiki website has some advice for hitchhikers.
Check and for carpooling options.
In the past few years, ATV travel has become popular among adventure travel enthusiasts.
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