Lipid-lowering drugs (LLDs) have protective effects against coronary artery disease (CAD) and cerebrovascular disease (CVD); however, a paradoxical association with cholesterol has been identified in several diseases, such as diabetes, dementia, and atrial fibrillation. We aimed to analyze the association between LLDs and cholesterol levels in older adults with type 2 diabetes mellitus (T2DM). This cross-sectional study enrolled consecutive patients aged ≥50 years from three centers in Taiwan. A multiple logistic regression model was used, and odds ratios (ORs) for different levels of total cholesterol (TC) or low-density-lipoprotein cholesterol (LDL-C) compared with the highest level were adjusted for age, triglyceride level, sex, comorbidities, and medications. Among the 3688 participants, 572 with and 676 without T2DM used LLDs. After adjusting for age and sex, the non-T2DM group demonstrated better medical conditions, cognition, and daily function than the T2DM group, regardless of LLD use. Compared to the highest TC level (≥240 mg/dL), ORs were significantly increased as TC levels decreased. A similar pattern of T2DM prevalence was observed in LDL-C levels. Older people with T2DM demonstrated low cognitive and daily functions. Significantly reduced TC and LDL levels were associated with a higher T2DM prevalence in older adults regardless of LLD use. T2DM was associated with impaired cognitive and daily functioning. A higher prevalence of T2DM in older people with low cholesterol levels raises doubt surrounding cognition and daily function being jeopardized when the “lower is better” strategy is applied for the secondary prevention of CAD or CVD.