Herbie, a Volkswagen Beetle with a mind of its own, is decommissioned and towed to a junkyard after losing several races. Maggie Peyton, the youngest member of the Peyton racing clan, graduates from college and is preparing to take up an internship with EPSN. Her father, Ray Peyton Sr., takes her to the junkyard to buy her a car as a graduation present, and she chooses Herbie after he wriggles free of a crane, landing on top of the car she originally selected. Herbie then takes Maggie to her mechanic friend Kevin, who agrees to take Herbie to a car show to buy parts. Herbie tricks Maggie into disguising herself in a racing suit and helmet and challenging NASCAR champion Trip Murphy to an impromptu race, which Herbie wins by a hair.
Kevin happily suggests that Maggie should race full-time, but Ray Sr. is concerned, having forbidden Maggie to race due to a street racing accident years ago. Trip becomes obsessed with Herbie and the mysterious driver and organizes a local racing competition to lure Herbie back for a rematch. Maggie and Kevin enter the event, with Herbie being given a new 'street racer look' and new parts. Herbie and Maggie easily defeat the other competitors and qualify for the final match with Trip, but when Trip talks Maggie into racing for pink slips, Herbie's jealousy over Maggie's desire to win Trip's stock car causes him and Maggie to lose the race. Maggie is publicly embarrassed, Herbie is towed away, and both Kevin and Ray Sr. express their disappointment with Maggie over her respective actions.