Cholesterol is an essential component of plasma membrane and precursor of biological active compounds, including hydroxycholesterols (HCs). HCs regulate cellular homeostasis of cholesterol; they can pass across the membrane and vascular barriers and act distantly as para- and endocrine agents. A small amount of 25-hydroxycholesterol (25-HC) is produced in the endoplasmic reticulum of most cells, where it serves as a potent regulator of the synthesis, intracellular transport, and storage of cholesterol. Production of 25-HC is strongly increased in the macrophages, dendrite cells, and microglia at the inflammatory response. The synthesis of 25-HC can be also upregulated in some neurological disorders, such as Alzheimer’s disease, amyotrophic lateral sclerosis, spastic paraplegia type 5, and X-linked adrenoleukodystrophy. However, it is unclear whether 25-HC aggravates these pathologies or has the protective properties. The molecular targets for 25-HC are transcriptional factors (LX receptors, SREBP2, ROR), G protein-coupled receptor (GPR183), ion channels (NMDA receptors, SLO1), adhesive molecules (α5β1 and ανβ3 integrins), and oxysterol-binding proteins. The diversity of 25-HC-binding proteins points to the ability of HC to affect many physiological and pathological processes. In this review, we focused on the regulation of 25-HC production and its universal role in the control of cellular cholesterol homeostasis, as well as the effects of 25-HC as a signaling molecule mediating the influence of inflammation on the processes in the neuromuscular system and brain. Based on the evidence collected, it can be suggested that 25-HC prevents accumulation of cellular cholesterol and serves as a potent modulator of neuroinflammation, synaptic transmission, and myelinization. An increased production of 25-HC in response to a various type of damage can have a protective role and reduce neuronal loss. At the same time, an excess of 25-HC may exert the neurotoxic effects.