In the recent years there has been an increased interest toward the biological activities of essential oils. However, essential oils are unstable and susceptible to degradation in the presence of oxygen, light and temperature. So, attempts have been made to preserve them through encapsulation in various colloidal systems such as microcapsules, microspheres, nanoemulsions and liposomes. This review focuses specifically on encapsulation of essential oils into liposomes. First, we present the techniques used to prepare liposomes encapsulating essential oils. The effects of essential oils and other factors on liposome characteristics such as size, encapsulation efficiency and thermal behavior of lipid bilayers are then discussed. The composition of lipid vesicles membrane, especially the type of phospholipids, cholesterol content, the molar ratio of essential oils to lipids, the preparation method and the kind of essential oil may affect the liposome size and the encapsulation efficiency. Several essential oils can decrease the size of liposomes, homogenize the liposomal dispersions, increase the fluidity and reduce the oxidation of the lipid bilayer. Moreover, liposomes can protect the fluidity of essential oils and are stable at 4–5 °C for 6 months at least. The applications of liposomes incorporating essential oils are also summarized in this review. Liposomes encapsulating essential oils are promising agents that can be used to increase the anti-microbial activity of the essential oils, to study the effect of essential oils on cell membranes, and to provide alternative therapeutic agents to treat several diseases.