Stem cell therapy is one of the most promising and effective approaches for treating diabetes, due to stem cell nonimmunogenic and nonimmunosupressive properties. Mesenchymal stem cells (MSCs) derived from human umbilical cord have been widely used in cell-based therapies for clinical applications. Among their various properties, immunomodulatory and proregenerative capacities broaden their scope for treating diabetes. Owing to various problems that are involved in treating diabetes, our review focuses on modulating umbilical cord-derived MSCs (UCMSCs) without any genetic manipulation. Umbilical cord tissue contains a rich source of MSCs with intact stemness. UCMSCs have profound effects on the remodeling process, maintaining similar morphology to various organs and escalating vascularization. Because of their neonatal origin, MSCs have enormous immune properties that lead to greater therapeutic benefits, including enhanced insulin sensitivity in type 2 diabetic (T2D) animal models and treatment of complications such as diabetic ulcers and compromised wound healing. MSCs ameliorate hyperglycemia by reducing inflammation due to their anti-inflammatory nature. Furthermore, their differentiation potential enables use in T1D treatment, wherein MSCs alone or insulin-producing cells that are derived from these MSCs, when transplanted in streptozotocin, induce animals to experience reversal of hyperglycemia. In this review, we discuss methods of UCMSC isolation, characterization, differentiation potential, and various applications in diabetes treatment.