That depends entirely on what you intend to do while you’re in Iceland. If you’re coming during winter then a 4x4 is the safest and most comfortable choice for handling the snow. It’s also a comfortable choice as you roam through the Icelandic roads, some of which are not paved and may prove a challenge for smaller vehicles.
If you're traveling to Iceland in the summertime and don't intend on going on any highland roads, then a small car will suit you perfectly fine.
Read our blog post about 4x4s for more info