Prion diseases are fatal and infectious neurodegenerative diseases that occur in humans and animals. They are caused by the misfolding of the cellular prion protein PrPc into the infectious isoform PrPSc. PrPSc accumulates mostly in endolysosomal vesicles of prion-infected cells, eventually causing neurodegeneration. In response to prion infection, elevated cholesterol levels and a reduction in membrane-attached small GTPase Rab7 have been observed in neuronal cells. Here, we investigated the molecular events causing an impaired Rab7 membrane attachment and the potential mechanistic link with elevated cholesterol levels in prion infection. We demonstrate that prion infection is associated with reduced levels of active Rab7 (Rab7.GTP) in persistently prion-infected neuronal cell lines, primary cerebellar granular neurons, and neurons in the brain of mice with terminal prion disease. In primary cerebellar granular neurons, levels of active Rab7 were increased during the very early stages of the prion infection prior to a significant decrease concomitant with PrPSc accumulation. The reduced activation of Rab7 in prion-infected neuronal cell lines is also associated with its reduced ubiquitination status, decreased interaction with its effector RILP, and altered lysosomal positioning. Consequently, the Rab7-mediated trafficking of low-density lipoprotein to lysosomes is delayed. This results in an impaired feedback regulation of cholesterol synthesis leading to an increase in cholesterol levels. Notably, transient overexpression of the constitutively active mutant of Rab7 rescues the delay in the low-density lipoprotein trafficking, hence reducing cholesterol levels and attenuating PrPSc propagation, demonstrating a mechanistic link between the loss of Rab7.GTP and elevated cholesterol levels.