The story begins with a frame story of young Kate sewing a quilt with her aunt Mrs May. Kate complains that some of her sewing supplies have gone missing and wonder where all the small household items that disappear really end up. Mrs May tells Kate about the Borrowers: miniature human-like creatures who live unseen in houses and "borrow" such items from the "human beans" that live there. She goes on to tell the story of how her younger brother once befriended a young Borrower named Arrietty.
Arrietty Clock lives with her parents Pod and Homily under the floor beneath a grandfather clock (Borrowers take their surnames from their living place.) One day Pod comes home shaken from a borrowing expedition. After Arrietty goes to bed, Pod tells Homily that he has been seen by a human boy who had been sent from India to live with his great-aunt while recovering from an illness. Remembering the fate of their niece Eggletina, who disappeared after the "human beans" brought a cat into the house, Pod and Homily decide to tell Arrietty. In the course of the ensuing conversation, Homily realizes that Arrietty ought to be allowed to go borrowing with Pod.
Several days later, Pod invites Arrietty to accompany him on a borrowing trip. Since Arrietty has only ever seen the outdoors through a grating, she is allowed to explore the garden, where she meets the Boy. After some trepidation on both their parts, Arrietty and the Boy strike a bargain: the Boy, who is bilingual and slow to learn English, will bring the highly literate Arrietty books if she will read to him. At one point, Arrietty tells the Boy that the world cannot possibly have enough resources to sustain very many humans. He disagrees and tells her that there are millions of people in India alone. Arrietty becomes upset when she realizes she cannot know that there are any Borrowers other than her own family. The Boy offers to take a letter to a badger sett two fields away where her Uncle Hendreary, Aunt Lupy, and their children are supposed to have emigrated.
Meanwhile, Arrietty learns from Pod and Homily that they get a "feeling" when big people approach. Concerned that she had no "feeling" when near the Boy, she practices by going to a passage below the kitchen, which is more frequently trafficked by humans than the rest of the house. There she overhears the cook Mrs Driver and the gardener Crampfurl discussing the Boy. Driver dislikes children in general and believes the Boy is up to no good, particularly when Crampfurl suspects that the Boy is keeping a pet ferret after seeing him in a field calling for "Uncle something."
The Boy delivers Arrietty's letter and returns with a mysterious response asking Arrietty to tell Aunt Lupy to come back. Pod catches Arrietty taking the letter from the Boy and brings her home. After Arrietty confesses everything she has told the Boy, Pod and Homily fear they will be forced to emigrate. The Boy soon finds the Clocks' home and brings them gifts of dollhouse furniture from the nursery. They experience a period of "borrowing beyond all dreams of borrowing" as the Boy returns with gift after gift. In return, Arrietty is allowed to go outside and read to him.
Driver suspects the Boy of stealing after catching him trying to open a curio cabinet full of valuable miniatures. One night she finds Arrietty's house from the bright candle light shining through the floorboards. Believing this is where the Boy cached his stolen goods, Driver peers beneath the boards and is horrified to discover the Borrowers in their home. To prevent the Boy from helping the Borrowers escape, she locks him in his room until it is time for him to return to India. Meanwhile, she hires a rat catcher to fumigate the house in order to trap the Borrowers. Driver cruelly allows the Boy out of his room so that he can watch when the Borrowers' bodies are found. The Boy manages to escape her and, running outside, break open the grating in hopes of providing an escape route. As he waits for the Borrowers to emerge, the cab arrives to take him away. Driver drags him to the cab and forces him inside, leaving the fate of the Borrowers unknown.
Some time later, the Boy's sister (a young Mrs May) visits the home herself in hopes of proving her brother's stories were real. She leaves small gifts at the badgers' sett, which are gone the next time she checks. Later she finds a miniature memoranda book in which the entire story of the Borrowers has been written, presumably by Arrietty. When Kate rejoices that the book means that the Borrowers survived and that the whole story was true, Mrs May points out that "Arrietty's" handwriting was identical to Mrs May's brother's.
