Hi Sincopated,
I live here and drive a car. I went through the process of getting a Spanish drivers' license and it certainly did not cost me 800€. You might want to get other proposals from other driving schools. I think, but am not certain, that you can take the drivers' license exam on your own, you don't need to have the backing of a driving school. You can prepare for the theoretical part of the exam at
Todo Test . Which is a great, free online website that has examples of the questions asked for the "written" part of the exam.
Costs associated with getting a drivers' license here include the "psicotecnico" which is the medical exam/hand-eye coordination exam, etc that you need to have done. I think it is in the ballpark of about 25€. You also have to pay for your exam fees, both theoretical and practical. I got my license 3 years ago so do not know what the current fees are.
The legality of driving here, as contradictory as it may seem, rests on your status here. If you are a legal resident, you are allowed to drive here legally with an international drivers' license for the first 6 months of your residency. After that you must get the Spanish drivers' license. Not doing so exposes you, as Nevado suggested, to a host of legal problems. So, if you have been a resident for more than 6 months, you need to get the license now, before you start driving.
If you are here as a tourist, then you are allowed to drive here with an international drivers' license. This permission is as good for as long as your tourist visa is, up until a year which is when the international drivers' license must be renewed.
Recently, the regulation was passed that you can drive a motorcycle/moped with a regular drivers' license. You no longer need to pass a separate licensing exam for them.
Hope this info has been helpful.
P.S. If you are seriously considering driving a motorcycle, please do yourself and the other drivers a favor by becoming appropriately licensed. I have seen way too many graphic accidents involving motorcycles here.
Adding more comments...
With regard to insurance...Yes, Spain does care. Any driver, operating within the law, must have with them at all times their driver's license, documentation indicating the car's inspection, documentation indicating the car's registration, proof of taxes paid on the car and proof of insurance (not just an insurance card, but also proof of the most recent payment... the bank statement).
Failure to produce these documents if/when stopped by the police will result in a fine. Controls/check points are frequent, especially in and around Madrid. So, you don't have to be doing anything illegal to be stopped and asked for this documentation. Recently, my husband was parked on a street for a half hour while he made some phone calls and did some paperwork for his clients (he is in sales). He was approached by the Guardia Civil and was asked to show all of his documentation...for the mere fact that he was parked in the same place for a half an hour.
Since the terrorist attacks in Atocha and the other train stations last year the controls have slowly been getting tighter. Just an FYI.