In 1987, Jerry Lundegaard (William H. Macy), an Oldsmobile car salesman from Minneapolis, hatches a plan to end unspecified but severe financial troubles. Through a mechanic at his dealership, a Native American ex-convict named Shep Proudfoot, he enlists the service of Carl Showalter (Steve Buscemi) and his partner Gaear Grimsrud (Peter Stormare), an ex-convict. At a bar in Fargo, North Dakota, the three discuss Jerry's plan to kidnap his wife Jean (Kristin Rudrüd) who will be returned unharmed for a ransom of $80,000, half of which is to go to Jerry. The kidnappers receive the other half, as well as an Oldsmobile Cutlass Ciera from the dealership. Jerry's greater plan is to tell his wealthy but antagonistic father-in-law, Wade Gustafson, that the ransom is $1 million, intending to use the large difference to settle the debts he has accrued.

Even after cutting the deal with the kidnappers, Jerry tries to sell his father-in-law on a $750,000 investment in a 40-acre parking lot. Initially skeptical, Wade eventually shows some interest in the deal; Jerry contacts Shep to have the kidnapping plan called off, but he tells Jerry he has no direct contact with Carl or Gaear.

Jerry goes to meet Wade at his office to discuss the deal. Wade and his accountant, Stan Grossman, say they're ready to make the deal; however, Jerry misunderstood the arrangement: Wade's firm wants to invest in the property and pay Jerry a finder's fee. Jerry was intent on borrowing the $750,000 to invest it himself, presumably so he could gain control of the funds and use them to pay off his debts. Wade tells Jerry that he has no intention of loaning him the $750,000, but if Jerry has no objection, Wade wants to pursue the project on his own.

While Jerry is at the meeting, Carl and Gaear break into his house. With a lot of struggle, they kidnap Jean. When Jerry returns to his ransacked house, he calls and tells Wade about the situation. Jerry claims that the kidnappers insist that the police not be contacted or they will harm Jean. Wade reluctantly takes his advice, but only after the concurrence of Grossman.

Later that night, on Minnesota State Highway 371 near Brainerd, the kidnapping takes a dramatic turn for the worse when a state trooper pulls over the two kidnappers because Carl has forgotten to put the temporary car-dealership license plates on the car. The trooper rebuffs his attempt at a bribe, then notices Jean lying in the backseat. Before the trooper can react, Gaear snatches a pistol out of the glove compartment and shoots him on the top of the head, then orders Carl to drag the body off the highway. A car drives by, speeding off once the two occupants witness the crime. Gaear takes the wheel of the Oldsmobile and pursues them at high speed. A few miles down the road, the witnesses' car skids off the highway and overturns. As Gaear pulls up, the driver pries himself out of the car and attempts to escape across a snowy field, but Gaear shoots him in the back while he is running. Gaear then approaches the overturned car, spots a young woman pinned inside the front passenger seat and calmly executes her with one shot.

The deaths are investigated the next morning by local police chief Marge Gunderson (Frances McDormand), who is seven months pregnant. She quickly deduces the chain of events and follows the leads that arise, investigating the dealer tags on the murderers' vehicle and interviewing two dim-witted prostitutes whose services the kidnappers had employed. She discovers that Shep Proudfoot is linked to the murderers through phone records from a truck stop where the kidnappers met with the prostitutes. Marge decides to take a trip to Minneapolis for investigations and to get together with an old friend from high school named Mike Yanagita (Steve Park), who tells her he is now a widower and awkwardly tries to flirt with her before breaking down in tears.

Marge interviews Shep and Jerry, both of whom claim not to be involved in the situation. She asks Jerry whether his dealership is missing any tan Cieras, catching Jerry off-guard. Shep later goes after Carl (who has come to Minneapolis to collect the money from Jerry), interrupts him having sex with a call-girl and beats him for threatening his freedom on parole. Recovered, but humiliated and angry, Carl demands Jerry deliver him the money atop a parking garage; Wade, mistrustful of his son-in-law, decides to deliver the ransom himself. At the meeting at the garage, Wade refuses to hand over the money until his daughter is returned. Wanting the money, Carl shoots Wade in the stomach. Wade pulls a gun from his pocket and shoots at Carl, the bullet grazing his face. Furious and frustrated, Carl shoots Wade several times and kills him. As he leaves the parking garage with the money, Carl passes Jerry, who has followed Wade. Arriving atop the parking garage, Jerry encounters Wade's body. Leaving the garage, Jerry passes the lot attendant's booth and is horrified to discover that Carl has murdered the attendant as well.

The next day, Jerry must field phone calls from a GMAC representative from whom he has obtained a fraudulent loan, ostensibly for the purchase of cars for the dealership. The GMAC rep complains that he cannot read the vehicle identification numbers on the financing documents he faxed, and therefore cannot correlate the money ($320,000) with actual vehicles. The GMAC rep threatens legal action and an anxious Jerry sees his schemes collapsing around him.

Discovering that the case contains a million dollars, a stunned (and injured) Carl buries most of the money by the side of a remote, snowy prairie highway and crudely marks the location with an ice scraper so he can find it later.

Before leaving Minneapolis on her way back to Brainerd, Marge learns that her friend Mike lied to her about being a widower (he was really stalking the woman he claimed to be his late wife and is the subject of a restraining order). After hearing this, Marge returns to the car dealership and questions Jerry again because she suspects he too lied to her. Thinking he has been caught when Marge asks to see Wade, Jerry panics and leaves the interview, which is evidence enough for Marge to call the State Police to find and arrest him. Jerry packs up and abandons his son to flee.

Carl returns to his and Gaear's backwoods hideout on Moose Lake (with the expected $80,000) and discovers that Gaear has apparently shot Jean for simply annoying him. In a dispute over who gets the Ciera, Carl tells Gaear that it belongs to him and storms out of the house. Suddenly, Gaear comes behind him with an axe.

Following up on a tip, Marge discovers where the kidnappers are hiding and comes on the property just in time to see Gaear pushing the last of Carl's body into a woodchipper. As Gaear flees across the frozen lake, Marge shoots him in the leg and arrests him. On the drive back to the station, Marge talks to Gaear, unable to comprehend why he can do what he does "for a little bit of money".

Jerry is later arrested in a motel outside Bismarck, North Dakota while on the run. In the final scene, Marge and her husband, Norm, sit in bed together watching television, and they discuss his mallard artwork winning the three-cent-stamp award. The fate of the hidden $920,000 remains unknown.