Cell-penetrating peptides (CPPs) are capable of delivering membrane-impermeable cargoes (including small molecules, peptides, proteins, nucleic acids, and nanoparticles) into the cytosol of mammalian cells and have the potential to revolutionize biomedical research and drug discovery. However, the mechanism of action of CPPs has remained poorly understood, especially how they escape from the endosome into the cytosol following endocytic uptake. We show herein that CPPs exit the endosome by inducing budding and collapse of CPP-enriched vesicles from the endosomal membrane. This mechanism provides a theoretical basis for designing CPPs and other delivery vehicles of improved efficiencies.