Although all comments were helpful it seems this question is a bit specific to the situation, so here’s the answer I found with research.
After contacting a few rental companies in Iceland and talking to the Smyril ferry lines, only one rental company, Reykjavik Cars, will allow the car to go off the island, whereas Smyril said it was ok on their side. Even within Europe, it still counts as taking the car to a different country so it’s not without complications. (For comparison, rental agreements here in Canada allow you to drive the car across the border to a contiguous US state)
The Smyril fare for a car is the same for any model as long as the car fits their maximum dimensions. It’s about 828 euros return with a car vs 370 without one. A quick search for a week’s rent on the Faroes comes down to about 460 euros, it’s actually about the same in expense but probably more practical to go on with the same car.
Flying return from KEF is about 1000$ when I checked. Keep in mind these prices are all for high season, June-July.
So the answer:
Cheapest seems to be flying actually, although rental fees are lower there is still gas to take into account. Most practical would be to ferry the Icelandic rental car across. And for anyone looking to ferry any rental car between countries, I’d recommend checking first with rental companies before the ferry lines.
I know from my trip to New Zealand that it is a potential issue to put a rental car on a ferry.
I rented a car via internet and gave as a pickup the south island and as a drop off the northern one. When finally in NZ and trying to pick up the car, they told me that is not possible despite me having a confirmed booking. They claimed that the insurance company does now allow them to do that.
Since it was an international car rental company and they most likely have global insurance contracts, I would assume that you might face the same issue. So better call them first and confirm.
Credit:stackoverflow.com‘
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