In the winter of 1987, Minneapolis car salesman Jerry Lundegaard (Macy) is desperate for money; repayment is due on a large GMAC loan that he fraudulently collateralized with nonexistent dealership vehicles. Dealership mechanic Shep Proudfoot (Steve Reevis), an ex-convict, refers him to an old partner in crime, Gaear Grimsrud (Stormare). Jerry travels to Fargo, North Dakota, where he hires Gaear and Carl Showalter (Buscemi) to kidnap his wife, Jean (Kristin Rudr d), and extort a ransom from his wealthy father-in-law and boss, Wade Gustafson (Presnell). He gives the men a new car from his dealership's lot, and promises to split the $80,000 ransom with them.
Back in Minneapolis, Jerry pitches Gustafson a lucrative real estate deal; when Gustafson agrees to front the money, Jerry attempts to call off the kidnapping, but it is already in motion. Then, he learns that Gustafson plans to make the deal himself, leaving Jerry a paltry finder's fee. Carl and Gaear kidnap Jean in Minneapolis as planned. While transporting her to their remote cabin hideout, a state trooper pulls them over outside Brainerd, Minnesota for driving without the required temporary tags over the dealership plates. After Carl tries and fails to bribe the trooper, Gaear kills him. When two passing eyewitnesses spot Carl disposing of the body, Gaear kills them as well.
The following morning, Brainerd police chief Marge Gunderson (McDormand), who is seven months pregnant, initiates a homicide investigation. Records from the murdered trooper's last traffic stop, along with a phone call to Proudfoot, placed at a local truck stop by two suspicious men, lead her to Jerry's dealership, where she questions Jerry and Proudfoot. While in Minneapolis, Marge reconnects with Mike Yanagita (Steve Park), an old classmate who takes her to dinner, tells her that his wife, another classmate, has died, and attempts to seduce her.
Jerry informs Gustafson and his accountant, Stan Grossman (Larry Brandenburg), that the kidnappers have demanded $1 million, and will deal only through him. Meanwhile, Carl, in light of the unanticipated complication of three murders, demands that Jerry hand over the entire ransom (which he still believes is $80,000); and GMAC gives Jerry 24 hours to repay their loan or face legal consequences.
When the time comes for the money drop, Gustafson decides to deal with the kidnappers himself. At the pre-arranged drop point in a parking garage, he refuses to hand over the cash-filled briefcase to Carl until his daughter is returned. Carl kills Gustafson, takes the briefcase, and flees, but not before taking a bullet in the jaw from Gustafson. When he opens the briefcase, Carl is astounded to discover far more than the anticipated $80,000. He removes that amount to split with Gaear, then stashes the rest, intending to return for it later and keep it for himself. At the hideout, he discovers that Gaear has killed Jean. After a heated argument over who gets the new car that Jerry gave them, Gaear kills Carl as well.
During a phone conversation with a mutual friend, Marge learns that Yanagita's dead wife was never his wife, nor is she dead, and that Yanagita is the perpetrator behind a long series of anonymous harassments. Reflecting on Yanagita's treachery and convincing lies, Marge returns to the car dealership and re-questions Jerry, who refuses to cooperate. When she asks to speak to Gustafson, Jerry panics and flees the dealership. After returning to Brainerd, Marge drives to Moose Lake, where she recognizes the dealership car from the dead trooper's description. She finds Gaear feeding the last of Carl's body into a wood chipper. He tries to escape, but Marge shoots him in the leg and arrests him. Meanwhile, North Dakota police track Jerry to a motel outside Bismarck, where he is arrested while attempting to escape through a bathroom window.
That night, Marge and her husband, Norm (John Carroll Lynch), discuss Norm's mallard painting, which has been selected as the design for a US postage stamp. Marge is very proud of his achievement, and the two happily anticipate the birth of their child.
Output: Why does Gaear kill Carl?