Abstract: Neurological disorders such as Alzheimer’s disease (AD), Parkinson’s disease (PD), ischemic stroke, multiple sclerosis (MS), neuropathic pain (NP), and temporal lobe epilepsy (TLE) pose major healthcare challenges due to their progressive nature and limited treatment options. Stem cell-based therapies have been emerging as a promising approach to repair or replace damaged neural tissues and restore functions. This review discusses types of stem cells and their therapeutic applications in neurological diseases. Special focus is given to emphasize the cellular microenvironment and immune system interactions that influence stem cell behavior and treatment outcomes. Advances in gene-modified stem cells, synthetic biology, and the development of organoids, brain-on-a-chip, and 3D models have improved preclinical evaluation and safety testing. Furthermore, the use of biomaterials and scaffolds has further enhanced cell delivery and integration and is also included in this review. Personalized and precision medicine approaches are also explored, along with current clinical trial outcomes. Despite advances, significant challenges, including limited cell survival and integration, immune rejection, risks of tumorigenicity or inappropriate differentiation, lack of standardized protocols, ethical considerations, and insufficient long-term clinical data, remain. Addressing these limitations will be essential for improving success in translation and advancing stem cell-based therapies toward routine clinical application in neurological disorders.