Resulting from impaired collagen turnover, fibrosis is a hallmark of adipose tissue (AT) dysfunction and obesity-associated insulin resistance (IR). Prolidase, also known as peptidase D (PEPD), plays a vital role in collagen turnover by degrading proline-containing dipeptides but its specific functional relevance in AT is unknown. Here we show that in human and mouse obesity, PEPD expression and activity decrease in AT, and PEPD is released into the systemic circulation, which promotes fibrosis and AT IR. Loss of the enzymatic function of PEPD by genetic ablation or pharmacological inhibition causes AT fibrosis in mice. In addition to its intracellular enzymatic role, secreted extracellular PEPD protein enhances macrophage and adipocyte fibro-inflammatory responses via EGFR signalling, thereby promoting AT fibrosis and IR. We further show that decreased prolidase activity is coupled with increased systemic levels of PEPD that act as a pathogenic trigger of AT fibrosis and IR. Thus, PEPD produced by macrophages might serve as a biomarker of AT fibro-inflammation and could represent a therapeutic target for AT fibrosis and obesity-associated IR and type 2 diabetes.