The plucky little #53 VW Bug named Herbie was once one of the most popular vehicles on the racing circuit in his day. However, over time, his popularity waned, until he eventually finds himself in the hands of a junk yard owner named Crazy Dave, who is planning to eventually crush the little beetle into scrap.
Meanwhile, Maggie Peyton has just graduated from college, and is planning to head to New York after the summer to work for ESPN. Though she appears happy for these plans, she secretly harbors a wish to race just like her Father, Grandfather, and Brother. However, while her Father and Grandfather had the 'ambition and drive,' her brother Rey Payton Jr just doesn't have it.
After her graduation, Rey Payton Sr takes his daughter to Crazy Dave's to pick out a used car of her own. Through a mishap perpetrated by Herbie, Maggie ends up as the beetle's new owner. However, once she starts Herbie up, he takes off in a mad dash to a nearby garage, owned by a young man named Kevin, who is a friend of Maggie's.
Noting Herbie's condition, Kevin decides to go with Maggie for a drive to test Herbie out. However, Herbie ends up driving the two of them to a local exotic car show, where famed NASCAR racer Trip Murphy is making a publicity appearance. After Trip makes a rude comment about Herbie's condition, the little beetle creates a major scratch along the side of Trip's personal vehicle. A race soon ensues, and Maggie (wearing a racing outfit with a darkened helmet), manages to beat Trip.
Herbie's beating Trip gives Maggie a thrill from winning a street race (something she promised her Dad she wouldn't do again after a serious accident some time before), but plunges Trip into a deep grudge over being beaten by an old VW beetle. Even though his manager (and brother) tells Trip to just ignore the 'fluke win,' Trip is determined to get back at Herbie and his racer. Trip then advertises a special racing event in the desert with the promise of a $10,000 cash prize to the person who beats him.
The ad catches the eye of Maggie and Kevin, who feel that the money could be a good thing for Maggie when she moves to New York. The two work to repair Herbie, and make him more race-worthy. At the race-off's tryouts, Herbie manages to beat all the other competitors. However, Trip has been watching Herbie and his mysterious driver, and finally confirms that it's Maggie.
After the day is over, Trip allows Maggie the chance to take his NASCAR racer for a ride in the desert. Trip then attempts to examine Herbie's engine to figure how the bug beat him, but Herbie ends up knocking Trip around instead.
When Maggie returns, Trip tricks Maggie into betting Herbie's ownership on the last race, claiming that if Maggie wins, she can have his NASCAR racer.
The next day, Herbie throws the race, when Maggie demands they win so she can have Trip's race car. The loss ends in Maggie's duel identity as Herbie's mysterious driver being exposed to the crowd...which also consists of her Dad. Rey Payton Sr angrily tells his displeasure that Maggie went back on her promise not to race, and Kevin is upset that Maggie would bet Herbie like she did.
Though it seems that everyone is upset with Maggie, her college friend Charisma (who was at the race) commends Maggie that she really seems to have a racer's spirit, and that it seems she would moreso enjoy racing than the upcoming position with ESPN.
After some soul-searching, Maggie visits Trip with the intent to buy back Herbie. However, Trip has sold Herbie to a demolition derby, with the intent that the little beetle will be demolished. Maggie manages to get to the derby, but not before Herbie is damaged quite badly.
The next day, Maggie's brother Rey Jr qualifies for the NEXTEL Cup race, but can't race due to a vision impairment. Rey then suggests that Maggie race in his place. Kevin also voices his affirmative, but Rey Sr refuses to allow this.
That evening, Maggie and Kevin assess Herbie's damage, and find that they do not have the funds to fix him. However, their solution comes in the form of Ray Jr who arrives, to tell Maggie that he is going to let her race in the NEXTEL Cup the next day. However, Maggie insists that she race in Herbie. Ray Jr and his pit crew then work overnight to fix Herbie and make him NASCAR-certified (as much as a VW Bug can be, anyways).
The next day, Trip Murphy is surprised to see Herbie enter the race. Eventually, Herbie manages to outperform most of the race favorites, but encounters fuel problems during the final laps. Maggie is more than willing to lose the race if it means Herbie will be alright, but Herbie manages to push on, intending to win the race...of which Trip is in the lead. It looks like Trip may win the race, but his ego gets the better of him, and he ends up crashing, allowing Herbie and Maggie to win, making her the first woman to win the NEXTEL Cup, and returning Herbie to prominence in the current racing world.