Niemann–Pick type C disease (NPC) is a childhood onset neurodegenerative disorder arising from lipid-trafficking defects caused by mutations in the NPC1 or NPC2 gene. Marked accumulation of autophagosomes is a prominent feature of NPC cells, yet a detailed understanding of the disease-associated alterations in autophagy and their role in pathogenesis has been lacking. Prior studies have shown that lipid storage in NPC disease induces autophagy. Here, we additionally show that the clearance of autophagosomes in NPC1 deficiency is impaired due to inhibition of lysosomal protease activity by stored lipids. We also demonstrate that the autophagic pathway is a source of stored cholesterol in the NPC lysosome, thus creating a positive feedback loop wherein autophagy induction exacerbates the disease via increased lipid storage. Inhibition of autophagy reduces cholesterol storage and restores normal lysosomal proteolysis in NPC1-deficient cells, supporting a model in which activation of the autophagic pathway promotes disease pathogenesis.