Type 2 diabetes (T2D) frequently occurs in the context of a dysregulation of plasma lipoproteins with an increased triglyceride content in pancreatic beta cells, leading to lipotoxicity and subsequent cell death. More recently, accumulating data suggest that cholesterol homeostasis is a major regulator of beta cell function. Intra-cellular cholesterol accumulation leads to islet dysfunction and impaired insulin secretion. The role of essential cholesterol modulators like the ATP-binding cassette transporter A1 or the LDL receptor has emerged in regulating insulin secretion in beta cells. Intracellular cholesterol impacts both the beta-cell membrane organization in microdomains as well as the dynamic regulation of glucose-induced insulin secretion. There is also evidence suggesting that the different lipoprotein classes have varying effects on beta cell apoptosis and proliferation. Here we review the impact of cholesterol metabolism on islet function and its potential relationship to T2D.