Perhaps its just the internet magnifying things, but I actually read about a few shady dealings through some of the Iceland car rental companies. It seems like most of the time, issues tend to come up around the sand/ash insurance (some people don't get it, and then rental company claims suspiciously large damage charges). It gets REALLY windy in Iceland, so I can see why it could be an issue. I just got the insurance.
If you're puttering around Reyjkavik and the Golden Circle you don't need a 4x4. If you are doing the circle route or going into the more remote areas, I would recommend it. The weather there can get pretty extreme, and a lot of the cooler spots require a little bit of off-roading. Even if you're not doing anything crazy, i think its nice to have as some places can get remote and you dont want to get stuck.
After doing some research, I found only good things about
https://icerental4x4.is/ and rented through them. They are more of a local dealer as opposed to a Hertz, I found them to be nice and professional, and while the car wasn't brand spanking new, it did everything I needed it to, and they included GPS for free.
Btw, one other bit of advice. Speed limits are slow in Iceland, but don't speed. You don't ever see a lot of cops, but they have radar boxes in many places, and apparently there's not much leeway for speeding, and the fines can get pretty crazy.
And yeah, definitely book as early as possible....Iceland does not have the infrastructure to handle the crowds that go there these days. The second largest city there is basically the size of Cochrane, and the hotel options outside of Reykjavik are pretty limited. If I went back, I would probably try to do the camping route instead...although there are also not a ton of public bathroom options, which has apparently become a big problem.