Notorious real estate magnate and demolition baron Alonzo Hawk (Keenan Wynn) is ready to build his newest indoor shopping center, the 130-story Hawk Plaza in San Francisco. His only obstacle is the 1892 firehouse inhabited by “Grandma” Steinmetz (Helen Hayes), widow of its former owner, Fire Captain Steinmetz, and aunt of mechanic Tennessee Steinmetz; her displaced neighbor, flight attendant Nicole Harris (Stefanie Powers); and their sentient machines: a 1963 Volkswagen Beetle known as Herbie, “the Love Bug;” an early 20th-century orchestrion that plays on its own; and a retired cable car from the defunct Clay Street Line, known as “Old No. 22.”
Hawk has made numerous attempts at evicting Mrs. Steinmetz, intending to imprison her in a retirement home of his own making; but Hawk’s lawyers have been unsuccessful in these attempts, while Mr. Barnsdorf, the construction boss, is growing impatient with Hawk’s alleged indecision, reminding him that the whole thing is costing him $80,000 a day (equal to $414737 today). Therefore, when Hawk’s lawyer nephew Willoughby Whitfield (Ken Berry) comes to visit him, Hawk sends him to Mrs. Steinmetz in their stead.
Mrs. Steinmetz takes a liking to the young lawyer due to his youthful looks and good manners, in contrast to Hawk’s henchmen. It is during her chatting with him that she explains the backstories of Herbie and Old No. 22, which Herbie found on a vacant lot whose owners were using it as a chicken house. She also explains that Tennessee has gone to Tibet to visit his ailing philosophy teacher, while Herbie’s former owner, Jim Douglas, has gone to Europe racing foreign cars. On first meeting Willoughby, Nicole punches him in the face upon learning that he works for Hawk, but then tries to make up to him by offering him a ride in Herbie. Herbie goes berserk after Willoughby insults him twice, eventually taking the two to a car version of a joust tournament, which Herbie wins over a character named “The Red Knight” (strongly resembling retired racer Peter Thorndyke from the previous film), earning Willoughby a whopping $3.00 (equal to $15.55 today). The two then go to lunch, but Nicole tells Willboughy an uninterrupted monologue on all the horrible things Hawk has done, including building a parking garage on the very same lot where Joe DiMaggio and his brothers learned to play baseball. Willoughby is upset about this and accidentally tells her that Hawk is his uncle, which enrages Nicole. She hits him with a broiled lobster in response, sending him splashing into the waters of Fisherman’s Wharf below.
Having become disillusioned towards his uncle, Willoughby decides to tell him face to face that he will not continue doing his dirty work. However, as he is approaching the office, he overhears his uncle threatening body harm on him for not getting in contact, so he resorts to telling him on the phone instead. Hawk flips out and shouts at his nephew, shattering the glass on the phone booth. Having lost him, Hawk decides to resort to harassment to force Mrs. Steinmetz out, the first act of which is to capture Herbie. Hawk is initially successful with his hotwiring skills, but while driving him on the street, Hawk insults the car who retaliates by causing a series of traffic collisions and jams (even going as far as barging into a police car, which causes a chain reaction of wrecks) and discards Hawk at his own office door, where Hawk orders his subordinates to capture Herbie again, followed by a policeman giving Hawk several tickets for traffic offenses. While Herbie takes Mrs. Steinmetz to market, they are chased by Hawk’s men; whereupon Herbie makes several daring escapes culminating in travelling through the 1909 landmark Sheraton Palace Hotel and along a suspension cable on the Golden Gate Bridge, leaving Mrs. Steinmetz unfazed (and unaware) of his activity throughout. Hawk’s secretary catches sight of Herbie on the bridge, but Hawk assumes she’s getting hysterical and orders her to take two aspirins and lie down.
Willoughby initially tries to go home in disguise, but is convinced by Nicole to stay after she hears him criticize his uncle while talking to his mother on the telephone. Mrs. Steinmetz asks Nicole and Willoughby to pick up some more groceries for her, and then suggests that they ought to drive to the beach. Nicole insists that they will just go and get some broccoli, which Willoughby later confesses he doesn’t like, but Herbie still goes to the beach as a result of Hawk’s personal chauffeur chasing him, leading Nicole to think that Mrs. Steinmetz talked him into doing it. They enjoy a nice moment at the beach, with Willoughby and Nicole falling for each other.
While heading home, they discover that the roadway has been blocked (due to Hawk’s chauffeur having bribed a man to do so), so Herbie resorts to surfing through the coastal bay to find an alternate route. On their return to the firehouse after dark, they find that every item of furniture has been removed by Hawk; whereupon Mrs. Steinmetz, Willoughby, Nicole, and Herbie track the theft to a warehouse. The four break in and recover Steinmetz’s belongings, all of which had been loaded into “No. 22.” Upon hearing Willoughby’s voice, the orchestrion attracts their attention by playing “Pomp and Circumstance.” Hawk’s hired security guards catch them in the act, but Herbie’s acts of pushing other items off the warehouse shelves trap them and allow the trio to escape. Mrs. Steinmetz rides in “No. 22,” while Willoughby and Nicole follow in Herbie.
An inebriated old-timer named Judson (John McIntire) joins Mrs Steinmetz aboard “No. 22,” thinking himself on a public cable car. Hawk pursues upon discovering the trio escaped, but Herbie distracts him and later rescues Mrs. Steinmetz and Judson from a potential crash after “No. 22” rolls down a hill (as well as into a building during a special dinner party) by getting Willoughby close enough so that he can jump aboard and use the handbrake. During this time, Mrs. Steinmetz becomes enamored with Judson (while being entirely oblivious to the fact the car is rolling down the hill).
The next morning, Mrs. Steinmetz decides to confront Hawk herself. Accompanied by Willoughby in spite of Nicole telling him not to let her do this, Mrs. Steinmetz drives Herbie onto the window-cleaning machine of Hawk’s skyscraper to reach his 28th-floor office (after Hawk fired his window cleaner), where they overhear a telephoned conversation with Loostgarten (Chuck McCann), an independent demolition agent, about the deal to demolish the firehouse. In response, she activates the window cleaning machine to fill the office with foam and water. This done, Herbie pursues Hawk around the building’s perimeter (in response to Hawk throwing an ashtray at him) – even following him outside onto a ledge – until Mrs Steinmetz orders him to desist by mentioning a used car lot, and saying she would have to hate to call the used car man, Mr. Honest Al.
Disguising his voice to resemble his uncle’s, Willoughby directs Loostgarten to demolish Hawk’s own house. Late that evening, Loostgarten telephones Hawk to confirm the demolition, waking Hawk from several nightmares showing himself at the mercy of Herbie; Hawk then gives confirmation, but realizes too late that he has condemned his own residence, and subsequently attacks Loostgarten after a portion of his house is collapsed from a wrecking ball.
In the morning, Hawk calls a truce with Mrs. Steinmetz (as well as plant a phony story in the newspaper with the headline “HAWK GIVES UP”!), and thinking him to be sincere, Willoughby and Nicole go for dinner (to the same restaurant they were before when Nicole hit Willoughby with the broiled lobster), while Mrs. Steinmetz invites Judson to a similar meeting; in spite of this, Hawk violates the truce by sending earthmovers to crush the firehouse and its inhabitants, prompting Herbie to go in search of Nicole and Willoughby. In the absence of Herbie, the only means of defense is an antique fire hose, which Judson uses against the earthmovers, until it explodes and sprays all over him.
Having obtained Nicole and Willoughby, Herbie rounds up several other Volkswagen Beetles from various places in the city (some of which leave their owners behind), and comes after Hawk and his men as an army and ruin his scheme, taking advantage of Hawk’s irrational fear of Herbie. Hawk is pursued from the grounds by Herbie, and after nearly getting knocked down by a police car, Hawk is arrested after telling his bizarre tale of an army of Beetles chasing him. Later, Nicole and Willoughby are married, and ride Herbie through an arch formed by his new Volkswagen Beetle friends.