In the winter of 1987, Jerry Lundegaard, the sales manager at an Oldsmobile dealership in Minneapolis, is desperate for money. He floats a GMAC loan worth $320,000, which he collateralizes with nonexistent vehicles and is unable to pay back. On the advice of the dealership mechanic (and paroled ex-convict) Shep Proudfoot, Jerry travels to Fargo, North Dakota and hires a duo of small-time criminals consisting of an outlaw named Carl Showalter and his sidekick and partner in-crime Gaear Grimsrud to kidnap his wife, Jean, and extort a ransom from his wealthy father-in-law and dealership boss, Wade Gustafson. Payment would be a new car, and half of the $80,000 ransom.
Jerry pitches Wade a lucrative real estate deal, and believes Wade has agreed to front him $750,000. Jerry tries to get Shep to call off the kidnapping but is unsuccessful. Jerry later goes to a meeting with Wade where he learns that Wade plans to make the deal himself, giving Jerry only a finder’s fee. At Jerry’s home, Carl and Gaear carry out the arranged kidnapping. As they transport Jean to their remote cabin on Moose Lake, a state trooper pulls them over outside Brainerd for driving without temporary tags. Carl’s attempt to bribe the trooper fails, and when the trooper hears a sound from the back seat where Jean is tied up, Gaear kills him, then chases down two eyewitnesses and shoots them dead as well.
The following morning, pregnant Brainerd police chief Marge Gunderson discovers that the dead trooper was ticketing a car with dealer plates and that later, two men driving a dealership vehicle checked into the nearby Blue Ox Motel with two call girls and later placed a call to Proudfoot. After questioning the prostitutes, Gunderson drives to Wade’s dealership, where Proudfoot feigns ignorance and Jerry insists no cars are missing. While in Minneapolis, Marge reconnects with Mike Yanagita, an old classmate. Yanagita awkwardly tries to romance Marge, before breaking down, saying his wife has died. Marge learns the following morning that Yanagita was lying due to a combination of loneliness and insanity.
Jerry informs Wade that the kidnappers have demanded $1 million and will deal only through him. Meanwhile, Carl, in light of the complication of three murders, demands that Jerry hand over the entire $80,000. GMAC gives Jerry just 24 hours to prove the existence of the vehicles or face legal consequences.
While Carl is having sex with another call girl in a motel room, Proudfoot enters and attacks him in a rage for bringing him under suspicion, having been questioned by Marge earlier in the day. Carl orders Jerry to deliver the ransom immediately, but Wade insists on making the money drop himself, driving to meet Carl carrying a loaded revolver. At the drop location in a Minneapolis parking garage, Wade tells Carl he will not hand over the money without seeing Jean, but does not yet display his concealed weapon. An enraged Carl pulls a gun and shoots Wade before Wade brandishes his revolver and shoots Carl in the jaw, severely wounding him; enraged, Carl shoots Wade to death and kicks his corpse; Jerry arrives moments later and finds Wade’s corpse along with that of a parking attendant Carl shot and killed while fleeing. After fleeing the scene, Carl is astounded to discover that the briefcase contains $1 million. He removes $80,000 to split with Gaear, then buries the rest alongside the highway. At the cabin, Gaear has killed Jean; Carl says they must split up and leave the state immediately. Carl and Gaear get into a heated argument over who will keep the car, with Carl using his injury as justification. After Carl shouts insults at Gaear and moves to take the car, Gaear kills and dismembers him with an axe.
Reflecting on Yanagita’s convincing lies, Marge returns to Gustafson’s dealership. Jerry continues to insist that he is not missing any cars. Marge asks him to check the inventory, then spots him fleeing the dealership, and calls the State Police. The next morning, she drives to Moose Lake on a tip from a local bar owner who had reported a “funny-looking guy” bragging about killing someone. Outside a cabin, she finds the car; nearby, Gaear is feeding Carl’s dismembered body into a woodchipper. Gaear attempts to flee on foot, only for Marge to shoot him in the leg and arrest him. Jerry flees to a Bismarck motel, where North Dakota police arrest him after he attempts to escape through a window.
Marge’s husband Norm, whose mallard painting has been selected for a 3-cent postage stamp, complains that his friend’s painting will be on the first class stamp. Marge reassures Norm that lots of people use 3-cent stamps, in particular when the price of postage increases and they need to make up the difference; the two happily anticipate the birth of their child in two months.