With the rapidly expanding evidence on brain structural and functional changes in type 2 diabetes mellitus (T2DM) patients, there is an increasing need to update our understanding on how T2DM associates with dementia as well as the underlying pathophysiological mechanisms. A literature search of T2DM and dementia or cognition impairments was carried out in electronic databases Medline, EMBASE, and Google Scholar. In this review, the chosen evidence was limited to human subject studies only, and data on either type 1 diabetes mellitus (T1DM) or non-classified diabetes were excluded. T2DM is a risk factor for both vascular dementia (VaD) and Alzheimer's disease (AD), although AD pathological marker studies have not provided sufficient evidence. T2DM interacts additively or synergistically with many factors, including old age, hypertension, total cholesterol, and APOE ϵ4 carrier status for impaired cognition functions seen in patients with T2DM. In addition, comorbid T2DM can worsen the clinical presentations of patients with either AD or VaD. In summary, T2DM increases the risk for AD through different mechanisms for VaD although some mechanisms may overlap. Tau-related neurofibrillary tangles instead of amyloid-β plaques are more likely to be the pathological biomarkers for T2DM-related dementia. Degeneration of neurons in the brain, impaired regional blood supply/metabolism, and genetic predisposition are all involved in T2DM-associated dementia or cognitive impairments.