Type 2 diabetes mellitus is a non-communicable metabolic disorder characterized by insulin resistance (IR) associated with defects in insulin production and secretion. Recent studies have shown that lipotoxicity, which is characterized by the abnormal accumulation of lipids in non-adipose tissues, leads to bodily dysfunction and metabolic disorders, thereby promoting the progression of T2DM. This process is mediated by the induction of endoplasmic reticulum (ER) stress, oxidative stress (OS), mitochondrial dysfunction, and inflammatory responses in pancreatic β-cells, ultimately leading to the activation of apoptosis pathways, which results in β-cell dysfunction and cell death. Furthermore, lipotoxicity interferes with insulin signaling pathways, which worsens IR. Current clinical approaches aimed at mitigating lipotoxicity-induced IR and β-cell dysfunction include the use of metformin, glucagon-like peptide-1 analogs, thiazolidinediones, and molecular chaperones, in addition to interventions such as caloric restriction and physical activity, which reduce fat accumulation in the pancreas and enhance β-cell function. Investigating the interplay between lipotoxicity and T2DM is essential for understanding the underlying disease mechanisms and providing new insights into prevention and therapeutic strategies. This review offers a comprehensive analysis of the mechanisms underlying lipotoxicity in T2DM, highlighting how these insights may drive future research and inform the development of novel treatment approaches.