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When it comes to renting a car in Oaxaca, a simple phrase springs to mind: “Don’t do it!"
Most of the time it works out better to hire a guide with transportation included. Hiring a taxi for the day is only a little more than renting a car for 24 hours, but a private guide and car is significantly more.
But once you do have a feel for the towns and have seen how the locals drive, renting a car can offer the opportunity to plan your own itinerary and visit less-touristy destinations. However, there are a number of issues to consider:
1) Though all rental agreements in Oaxaca include insurance, there is no guarantee that the rental company will comply with the contract should you have an accident. It is vitally important to call the rental car company immediately after an accident of any sort (including one involving a telephone pole or other inanimate object) and to leave the car at the site of the accident. They will call the insurance company who will come and take photographs and fill out an accident report. Also report the accident directly to your credit card company immediately.
2) The rental car companies require that you sign two blank credit card forms as a 'deposit'. If you do not have an accident, all will be fine as the company will tear up the blank forms when you return the car. If you do have an accident, however, they will charge significantly more than the agreed price, even though you have paid for insurance.
3) While many of the rental forms are in both Spanish and English, the English translations are often poor and difficult. If you are not able to read Spanish adequately, be careful!
In short, if you rent a car and you have an accident, you will be charged regardless of the insurance the company offers. If you do not, then you will have had a wonderful exploration of Oaxaca.