Neuronal endosomal and lysosomal abnormalities are among the early changes observed in Alzheimer’s disease (AD) before plaques appear. However, it is unclear whether distinct endolysosomal defects are temporally organized and how altered γ-secretase function or amyloid precursor protein (APP) metabolism contribute to these changes. Inhibiting γ-secretase chronically, in mouse embryonic fibroblast and hippocampal neurons, led to a gradual endolysosomal collapse initiated by decreased lysosomal calcium and increased cholesterol, causing downstream defects in endosomal recycling and maturation. This endolysosomal demise is γ-secretase dependent, requires membrane-tethered APP cytoplasmic domains, and is rescued by APP depletion. APP C-terminal fragments (CTFs) localized to late endosome/lysosome-endoplasmic reticulum contacts; an excess of APP-CTFs herein reduced lysosomal Ca2+ refilling from the endoplasmic reticulum, promoting cholesterol accretion. Tonic regulation by APP-CTFs provides a mechanistic explanation for their cellular toxicity: failure to timely degrade APP-CTFs sustains downstream signaling, instigating lysosomal dyshomeostasis, as observed in prodromal AD. This is the opposite of substrates such as Notch, which require intramembrane proteolysis to initiate signaling.