Villarrica was founded by Gerónimo de Alderete who, under the orders of the governor Pedro de Valdivia, established the city in April 1552. At that time 50 people set up home there. It would appear that its original name was simply Villarrica, due to the belief that abundant gold and silver deposits existed, and not Santa María Magdalena de Villarrica as was traditionally shown. This later change in name was due to the existence of the Parish Church of the city, whose patron saint was this one.

Villarrica was abandoned in 1554, after the Spanish defeat of Tucapel, where Pedro de Valdivia lost his life. It was repopulated five years later (1559) by order of García Hurtado de Mendoza after the general Mapuche uprising of that year.

In 1602 it was completely destroyed by the Mapuches, who kept control of the zone until January 1 1883, the date on which, by means of an agreement between Chief Epulef and Colonel Gregorio Urrutia, the Government finally took control of the zone peacefully. It was rebuilt and turned into a city on January 2, 1897. In June 1916 the municipality of Villarrica was formed. Nowadays it has a population of approximately 36,000 and it is the administrative center and focal point for the stream of tourists who come to the zone.

The presence of the volcano has always been an attraction for tourists, who would in the old days get there by train until Freire and then on horseback to Villarrica. In 1924 a motor vehicle was introduced which connected the two cities.