questionswhat are the best travel/lodging arrangements in…

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Since it sounds like you have some time to decide, I would suggest checking out airbnb.com! It is a community of people all over the world who are willing to rent you out their personal homes/apartments for (sometimes) significantly less than a typical hotel or even hostel! Since it's community based, you don't have to worry about ending up somewhere creepy because it is all based on reviews of people who have actually stayed there before. Depending on whether you're willing to stay in a more remote city, prices could be very, very affordable. You might end up with a whole apartment for your family around $300 for a month! Now this doesn't include airfare obviously, but I have had some friends say that they had a wonderful experience with Iceland Air flights. When you're there, definitely try to check out as many castles as possible. Good luck, and have a great trip!

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Friends went on a "whisky and castle tour" of Scotland. They planned it out themselves, rented cars ( Designated drivers ! }
Looked up smaller and bigger makers on line and plotted out where they wanted to go. Stayed in small pubs and Inns.

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@dows: I second the airbnb suggestion. I rented a 3br house in New Orleans through them last year for 6 days for $1,200, less than half the cost of a hotel for our group, and the owner allowed us to bring a dog which we probably couldn't have done with a hotel. We had a fully furnished kitchen so we cooked our own breakfast most mornings, which also saved us a lot. We had a fenced back yard where I sat and read in the morning. But more than those things, it made us feel really at home to stay in a home rather than a hotel.

If you rent a car, driving on the other side of the road is more challenging than you may think. A co-worker went on a family vacation to England, on their first day they pulled out of a parking lot on the wrong side of the road and had a head-on collision. They spent their whole vacation in the hospital and sent some innocent Brit to one too. We rented a car in Australia and my friend had a strangely hard time staying in his lane.

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Thanks for the input @dows and @ceagee.
The AirBnB website seems nice. I like the reviews and whatnot posted on there.
@moondrake -- noted on the driving. Part of me is looking forward to it, but it'll be weird, to say the least!

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@sgrman05: Now I remember the lane thing better. We were driving on the coastal highway from Melbourne out to the Twelve Apostles rock formations, a five hour drive. each way Lots of pretty country and periods of pouring rain (which became flooding a few hours later) to distract and distress. But what seemed to be the biggest problem was that he couldn't get used to the cars rocketing at us on the right. He kept creeping over the line toward the guard rail on our left as he felt very dodgy about the oncoming traffic to the right.