Cholesterol metabolism plays an essential role in cellular functions (including as a component of the plasma membrane, as an energy source, and in hormone production) under normal conditions. Dysregulated cholesterol metabolism causes a wide spectrum of pathological conditions, leading to neuropsychiatric disorders, such as anxiety and depression. In addition, patients with neuropsychiatric disorders also have impaired cholesterol metabolism. Therefore, metabolic disturbances are closely associated with the neuropsychiatric disorders. Although immune disturbance, neuroinflammation, a dysregulated neurotransmitter system, and oxidative stress have been suggested as pathophysiology of neuropsychiatric disorders, dysregulation of cholesterol metabolism is also found in patients with psychiatric diseases. As expected, patients with mental illness appear to be at risk of metabolic disorders, including metabolic syndrome, in which cholesterol influences altered neuronal homeostasis, such as neuronal cell toxicity, neuronal cell death, and neuronal structures and functions, including synaptogenesis, neurogenesis, axonogenesis, and action potential. Therefore, reversing impaired or abnormal cholesterol metabolism may help restore neuronal injury found in mental illness. This review is aimed to discuss the links between cholesterol metabolism impairment and neuropsychiatric disorders and provides insights into neuronal dysfunction due to abnormal cholesterol metabolism in neuropsychiatric disorders.