Plot

Herbie, the magical Volkswagen Beetle, is passed on to a new owner. Together, they must battle a dastardly racer and his devil-car "Horace", an evil Herbie.

The narrator, Jim Douglas (Dean Jones), unfolds the story of Herbie the Volkswagen Beetle. Herbie was owned by an egotistic man named Simon Moore III (John Hannah). Due to his arrogance, he does not treat Herbie very well. During a race, Simon Moore III swears at Herbie, which caused Herbie to not want to listen to his owner. They end up in last place for the race. Simon was not pleased, and he throws out Herbie to the garbage dump.

For the time being, a man named Hank Cooper (Bruce Campbell), himself an ex-racing driver and former rival of Moore's, who works in a small mechanic garage. His boss, Chuck (Clarence Williams III), enters Hank into a junk-car race, where drivers select a jalopy and attempt to repair and race it. He saw Herbie near his mechanic garage and is stunned to the little car which was formerly known as the Douglas car. Assisted by his "spiritually enlightened" but goofy artist friend Roddy (Kevin J. O'Connor), Hank manages to get Herbie started just before he is towed off the track. Hank is even more stunned to see the car running while missing several key parts.

In the race, the judges are Donny Shotz (Micky Dolenz), who is obsessed with cars, Alex (Alexandra Wentworth), who Hank used to date and finally Simon.

In appreciation of Hank's kindness, Herbie manages to win the one-lap race, restoring Hank's confidence in his racing ability. Simon & Alex cannot believe that Hank actually won the race and Alex challenges Hank to prove that he didn't use any tricks during the race. Alex goes on a test drive with Hank in Herbie & again Herbie does incredible things, which any ordinary car his age should never be able to do. Herbie is very fond of Hank and approves of how he is being treated.

Meanwhile, Roddy tells Hank that he believes Herbie is special, but Hank shows resentment toward Herbie, still bitter at the outcome of his failed racing career. Roddy takes Herbie to an automotive art show, where Alex and Hank continue talking about their relationship, and Herbie, much to Hank's annoyance. However, Herbie does not seem fond of her as Alex wants to do a magazine piece on Herbie, which he is not sure of.

Simon also sees Herbie at the show and attempts to discover why the car that failed him took Hank to victory. Simon is searching for an engineer who invented Herbie. He eventually finds the owner: Dr. Gustav Stumpfel (Harold Gould). Stumpfel explains that he created the original beetle in Nazi Germany & was asked by US Amry to come to the US & build them a car that was "alive". Stumpfel was young, & didn't say no. He realized that the design of the car didn't matter, only the metal it was made from did. So he experimented with every metal combination, until one day his prized possession, a photo of his dead wife, fell into the metal cauldron, giving it life. He then hid the car from the US Army & set it free. He asks Dr. Gustav to create another car, but he wants the car to be pure evil and black, so puts his own photo in the metal mix to give it its own personality. He ends up naming the second car Horace the Hate Bug - Herbie's evil counterpart.

Hank is upset that his big win at the race is not getting him any opportunities as everyone believes that the car was responsible for it. Hank leaves in a huff, & Herbie goes to look for him. Only when Hank returns to an empty workshop, he realizes that Herbie is alive & has feelings.

Devastated, Herbie is looking for Hank but is then followed by the black edition car Horace and Simon. They cornered Herbie in a dark alley and continuously smashes Herbie until he is completely destroyed. Hank, now convinced Herbie is alive after previously refusing to believe Roddy, catches up with Herbie, but is too late to save him.

Afterwards, Hank finds Herbie, saddened and believing that Herbie has died, gives him a funeral. However, Herbie's former owner, Jim Douglas (Dean Jones), explains to Hank that he can be repaired provided they use all of Herbie's original parts. Hank gets Donny Shotz to reshape and repaint Herbie's sheet metal while Hank, Roddy, Alex, and Jim all work together to rebuild Herbie.

Jim reminisces with Alex and Hank about his ownership of Herbie, including how he first met Carole, and Alex and Hank realize that Herbie was also doing the same thing for them. When they have finished, Hank gives Jim the honor of trying to start Herbie, which Jim accepts. Herbie starts on the first try and sounds his horn, assuring them he is still the same car they have come to know and love.

Hank looks for Simon and makes a bet for a race between Horace and Herbie.

Meanwhile, Simon discovers that Herbie has been rebuilt, and challenges Hank to a one-on-one race between Horace and Herbie. Although Simon makes every attempt to sabotage the race, including the use of grenades, Herbie comes through to win even after being cut in half by Horace's laser beam.

Furious, Horace tries to destroy Herbie again by ramming him off a cliff, but misses and ends up falling into a ravine, destroying himself. Simon and his partner Rupert are then arrested for illegally detonating explosives, driving an unregistered devil car and illegally dumping it.

Hank and Alex drive off for a date in Herbie after finishing up on a magazine article and photo-shoot about the little car.