If you're brave...
Updated April 2016
Renting a car to drive in Bali, although not as complicated as in Jakarta, is still not a viable proposition for most people not used to the mostly disregarded traffic rules, which makes the chance of an accident a real possibility. There are more mopeds than cars on the roads of Bali (as in other areas of Indonesia) and they will overtake you from all sides without warning, changing lanes dangerously between moving cars, and often riding on the wrong side of the road. At night, many have no lights. Extreme care must be taken, and in the case of an accident your inability to speak the local language will put you at a disadvantage. If you do rent a car, make sure that you take full insurance. However, most rent-a-car companies offer chauffeur-driven vehicles, at reasonable rates, that take the hassle out of the visitor.
If you insist... , Avis Rent-a-Car is the best option. It has a presence at the airport and in Denpasar town centre.
A cheaper and popular alternative with foreign tourists is the rental of a moped. They cost around US$10 a day, allow you to avoid the traffic jams and can be fun. However, as with cars, traffic is unpredictable; other bikes are often driven at speeds and with manoeuvres that are dangerous to other road users.
In Kuta and Legian, in particular, you will find rental outlets everywhere - but be careful who you rent from; it is a good idea to get advice from other tourists that you see riding around town, or from the hotel porter (although the latter will, most probably, send you to the hire firm that pays him the best commission...).
Europeans, North Americans, those Down-Under, and just about every other nationality need an International Driving licence to rent a car or motorbike (scooter). This should be done at home before you leave from the appropriate issuers (usually motor organizations). The International licence must be accompanied by your permanent home licence, as it is not valid without it.
For those who forgot to obtain the International licence before leaving, it is possible to get a local temporary tourist licence from the Poltabes Denpasar Police station at Jl. Gunung Sangiang, Tel: +62 361 424346. If you are staying around Kuta ask the local Tourist Police (Jl. Kartika), which is the nearest address where you can get it.
New legislation comes into effect on 1st of May 2016. The official cost is Rp 120000 for a car licence, and Rp100000 for a motorbike, but bear in mind that "difficulties" may arise, for which a "helping" intermediary is advantageous. That helper could be a police officer, or a guide from the rental agency, and the total cost of obtaining the licence may go up. You should get it while you wait, or may be asked to return the next day (depends on the intermediary...); it will be valid for the length of the tourist visa. Reports about this police station is that they are friendly and will help you obtain the licence at no extra cost.
You will need copies of your passport, tourist visa, and a health certificate. If done in Poltabes Denpasar, there is a hospital opposite that can do it in 5 minutes and charge around Rp.25000 (less than US$3). Additionally, there will be an exam, in English for foreigners, which amounts to multiple-choice questions. The applicants are allowed 4 mistakes, and if needed a second exam. If they fail both, they must wait one week to take another test. However, this is Indonesia, and with a bit of charm... A short practical test, may or may not be required.
Having said all this, bear in mind that corruption is a crime in Indonesia, and that the government is actively trying to curb the practice by its officials. You should not offer any inducements to police officers. Just pay what they ask, if they ask and you agree.
The minimum age for driving 2-wheel motorbikes or 4-wheel cars is 17 years of age.
Make sure that you are adequately covered by your own insurance back home, if you are not renting from an international company of renown. While riding motorbikes, some insurance companies will refuse to pay if the riders are not properly protected (helmet and proper clothing). Pillion passengers may also be required to hold a valid licence...