Villarrica was founded by Don Gerónimo de Alderete, who set up the city in April 1552 under the orders of governor Pedro de Valdivia. Fifty neighbours settled on that occasion. Apparently, the original name was simply Villarrica, and not Santa María Magdalena de Villarrica as traditionally pointed out. This transformation was due to the existence of the city parish church under the advocation of such saint.
Villarrica was abandoned in 1554, after the Spanish defeat in Tucapel when Pedro de Valdivia died. In 1559 it was repopulated by order of don García Hurtado de Mendoza after the defeat in the general Mapuche revolt that same year.
In 1602 it was completely destroyed by the Mapuche who kept their domain on the area until 1st January 1883, the date when Cacique Epulef and Colonel Gregorio Urrutia came to an agreement, and the government took possession of the area in a pacific definitive way. It was reconstructed and declared city on 2nd January 1897. In June 1916, the commune of Villarrica was created. At present, it has a population of some 36.000 inhabitants and is the administrative centre and receptor of touristic flow arriving at the area.
The volcano has always been an attraction for tourists, who at the beginning had to travel by train up to Freire, and then on horseback to Villarrica, and only in 1924 was there a motor vehicle connecting both cities.
The first hotels opened in 1923, and the railway arrived to the dock on the lake in 1933.