Waterloo was originally known as "Prairie Rapids Crossing". The town was established, according to the original researcher as reported by staff of the Grout Museum in Waterloo, near two Meskwaki [[American tribal (US)[American tribal]] seasonal camps alongside the Cedar River. It was first settled in 1845 when George and Mary Melrose Hanna and their children arrived on the east bank of the Red Cedar River (now just called the Cedar River). They were followed by the Virden and Mullan families in 1846. Evidence of these earliest families can still be found in the street names Hanna Blvd., Mullan Avenue and Virden Creek.

The name "Waterloo" supplanted the original name, "Prairie Rapids Crossing" shortly after Charles Mullan petitioned for a post office in the town. Since the signed petition did not include the name of the proposed post office location, Mullan was charged with selecting the name when he submitted the petition. Tradition has it that as he flipped through a list of other post offices in the United States, he came upon the name "Waterloo." The name struck his fancy, and on December 29, 1851, a post office was established under that name. The town was later called the same, and Mullan served as the first postmaster from December 29, 1851 until August 11, 1854.

There were two extended periods of rapid growth over the next 115 years. From 1895 to 1915, the population increased from 8,490 to 33,097 a 290% increase. From 1925 to 1960, population increased from 36,771 to 71,755. The 1895 to 1915 period was a time of the rapid growth in manufacturing, rail transportation and wholesale operations. It was during this period the Waterloo Gasoline Traction Engine Company moved to Waterloo and was shortly after Rath Packing Company had relocated from Dubuque. Another major employer Waterloo throughout the first two-thirds of the 20th Century was the Illinois Central Railroad. Among the others was the less-successful brass era automobile manufacturer, the Maytag-Mason Motor Company.

On June 7, 1934. Bank Robber Tommy Carroll had a shootout with the F.B.I. when he and his wife stopped to pick up gas. Accidentally parking next to a police car and wasting time dropping his gun and picking it back up, Carroll was forced to flee into an alley where he was shot. Carroll was then taken to Allen Memorial Hospital in Waterloo, where he died shortly after.

Waterloo suffered particularly hard in the agricultural recession of the 1980s, due to the major employers at the time being heavily rooted in agriculture. In particular, John Deere, the area's largest employer, cut 10,000 jobs, and the Rath meatpacking plant closed altogether, losing 2500 jobs. It is estimated Waterloo lost 14% of its population during this time. Today the city enjoys a broader industrial base, as city leaders have sought to diversify the industrial and commercial mix. Deere remains a strong presence in the city, but employs only roughly one-third the number of jobs it did at its peak.

June 2008 saw the worst flooding in the Waterloo-Cedar Falls area had ever recorded; other major floods include the Great Flood of 1993. The flood control system constructed in the 1970s-1990s largely functioned as designed. For those areas not protected by the system, the Cedar River poured out of its banks and into parking lots, backyards and across the rich Iowa farmland surrounding the city. Although much damage was done, the larger, downstream city of Cedar Rapids was much harder hit.

An area of the west side of the downtown and an area near the former Rath Packing facility were impacted not directly by water coming from the river but were the result of storm runoff draining towards the river but then being trapped on the backside of the flood levy system. These areas did not have lift stations or alternate pumping capacity sufficient to force this water to the river side of the control system. Areas where lift stations had been constructed (Virden Creek and East 7th Street ) to pump this storm runoff into the swollen river remained largely dry (the east and north sides of downtown). Several areas experienced water seeping into basements due to high water table levels.

Below, according to the National Weather Service are the ten highest crests of the Cedar River recorded at East 7th Street in downtown Waterloo:

Historical Crests(1) 27.01 ft on 11 June 2008(2) 21.86 ft on 29 March 1961(3) 21.67 ft on 8 April 1965(4) 20.78 ft on 23 July 1999(5) 20.60 ft on 2 June 1993(6) 20.54 ft on 2 April 1993(7) 20.15 ft on 29 June 1969(8) 20.00 ft on 16 March 1929(9) 19.50 ft on 2 April 1933(10) 19.26 ft on 31 March 1962

It should be noted that crests reported in the 1960s and prior were before completion of major flood control projects and therefore may not be directly comparable.