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If you like to be free to go where you want, when you want, at your own pace, driving is a good solution. It is not as difficult as it seems to some people and it is not as easy as it seems to others. You must be an experienced and confident driver because in Thailand it is tricky and not only because they drive on the LEFT side of the road.
Fact is, Thais don't learn how to drive before using a car, it will come as no surprise that they have a very high rate of road casualties. A liking for heavy drinking (beware at night) and the widespread use of mobile phones don't help. But if you drive DEFENSIVELY you should manage.
To visit the city and its close surroundings, like the Doi Suthep, the Sankampaeng road (factories, hot springs, Borsang village) or the Mae Rim area (elephant camp, orchid and snake farms, waterfalls) a motorcycle would suffice.
You can choose a full automatic scooter or a semi automatic one (auto clutch) better suited if you go in the mountain. Prices should start at 100฿ up to 300฿ a day (gas not included). Note that there is no full coverage insurance, in fact if you're the culprit, you'll pay for any damage you cause.
Nobody in the rental shop will ask you for a driving licence, but you better have an international drivers permit and your own national licence to meet the expectations of Thai law and your own insurance standards. You MAY be asked to leave your passport, or a photocopy + a deposit.
If the rental agency won't budge, go elsewhere.
The police WILL stop foreigners if they fail to wear a helmet. All motorcycle rentals will include a plastic helmet of varying condition. You may prefer to spend 400฿ and purchase a new one, especially if you're to spend a few days riding the countryside.
400฿ is also the approximate fine if your caught not wearing one. Anecdotally, after the 15th of the month, Police tend to enforce the law more rigorously (nothing to do with the lunar calendar, it is just that their meagre income doesn't last that far).
If you want to go farther away from Chiang Mai, like the Golden Triangle, the Mae Hong Son loop, or the Doi Inthanon Park, you may need to rent a car. However, if you're comfortable riding a motorbike (even a small one), it's a great way to see the mountains. To read more about motorbike trips, check out How to Have a Sweet Motorbike Trip.
You'll find local rental shops or international names in the city. The cheapest car you can rent is a Suzuki Carribean, 4WD, the closest thing you'll find to a tin can. But at 800฿ a day it's a good deal. Otherwise a good full automatic sedan is enough to deal with the roads as long as you don't venture into side tracks.
www.budget.co.th are recommended.
Be very careful when you rent from a budget company. Remember that if you are renting from a small company, there is no road service and you will even be charged for a flat that you had to pay to have repaired. It is assumed that flat tires are your fault. Read the fine print of the contract. If you have a problem, you can call the Tourist Police, who are wonderful, though the response time is not quite as fast as in the US or European coountires.
Gas/Petrol stations are plentiful, although not all will accept credit cards, so be sure to have cash with you.
On the mountain roads, trucks and buses can be agonisingly slow. Overtaking is an art you have to master if you don't want to be stuck in dense black fumes for 10 minutes. Thais can be seen overtaking on curves, or within close proximity to oncoming traffic. There is only one thing to do, stay on the left side as much you can and pull over if necessary because the incoming car won't. You may be stopped by police checkpoints en-route to the North. They may or may not check that your documents are in order... just smile, remain calm and polite. If you're not blatantly misbehaving you'll soon be on your way.
REMEMBER: 1155 - The Tourist Police. In case of problems, they're the ones you should contact.
To stay strictly within the law while operating ANY vehicle (car or motorcycle) on Thai public roads READ this - LINK