Nonalcoholic fatty liver disease (NAFLD) is commonly found in adults and adolescents with type 2 diabetes (T2DM). The cause-effect relations of these 2 conditions are complex and it is difficult to decipher whether one drives the other or vice versa. Genetic predispositions, along with obesity, are probably shared culprits of both. NAFLD may precede the diagnosis of diabetes and play a critical role of driving its development by way of increasing hepatic and whole body insulin resistance. On the other hand, T2DM is associated with hyperinsulinemia, a resistance to some of the effects of gut derived peptides and increased systemic free fatty acids, that can all promote hepatic lipid deposition. Thus, each condition may promote the development of the other and their mutual presence creates a vicious cycle. Upon studying this complex interplay from another angle, reduction of liver fat significantly improves glucose metabolism in patients with T2DM highlighting the tight pathophysiological link between them.