Iron oxide nanoparticles (NPs) are frequently employed in biomedical research as magnetic resonance (MR) contrast agents where high intracellular levels are required to clearly depict signal alterations. To date, the toxicity and applicability of these particles have not been completely unraveled. Here, we show that endosomal localization of different iron oxide particles results in their degradation and in reduced MR contrast, the rate of which is governed mainly by the stability of the coating. The release of ferric iron generates reactive species, which greatly affect cell functionality. Lipid-coated NPs display the highest stability and furthermore exhibit intracellular clustering, which significantly enhances their MR properties and intracellular persistence. These findings are of considerable importance because, depending on the nature of the coating, particles can be rapidly degraded, thus completely annihilating their MR contrast to levels not detectable when compared to controls and greatly impeding cell functionality, thereby hindering their application in functional in vivo studies.