Haploinsufficiency of GRN, the gene encoding progranulin (PGRN), causes frontotemporal lobar degeneration (FTLD), the second most common cause of early-onset dementia. Receptor-mediated lysosomal targeting has been shown to regulate brain PGRN levels, and complete deficiency of PGRN is a direct cause of neuronal ceroid lipofuscinosis (NCL), a lysosomal storage disease. Here we show that the lysosomal cysteine protease cathepsin L (Cat L) can mediate the proteolytic cleavage of intracellular PGRN into poly-granulin and granulin fragments. Further, PGRN and Cat L co-localize in lysosomes of HEK293 cells, iPSC-derived neurons and human cortical neurons from human postmortem tissue. These data identify Cat L as a key intracellular lysosomal PGRN protease, and provides an intriguing new link between lysosomal dysfunction and FTLD.