Mammalian Toll-like receptors (TLRs) 3, 7, 8 and 9 initiate immune responses to infection by recognizing microbial nucleic acids; however, these responses come at the cost of potential autoimmunity due to inappropriate recognition of self nucleic acid. The localization of TLR9 and TLR7 to intracellular compartments appears to play a role in facilitating responses to viral nucleic acids while maintaining tolerance to self nucleic acid, yet the cell biology regulating the trafficking and localization of these receptors remains poorly understood. Here, we define the route by which TLR9 and TLR7 exit the endoplasmic reticulum (ER) and traffic to endolysosomes. Surprisingly, the ectodomains of TLR9 and TLR7 are cleaved in the endolysosome, such that no full-length protein is detectable in the compartment where ligand is recognized. Remarkably, though both forms of TLR9 are capable of binding ligand, only the processed form of TLR9 recruits MyD88 upon activation, arguing that this truncated receptor, rather than the full-length form, is functional. TLR9 proteolysis is a multi-step process. The first step removes the majority of the ectodomain and can be carried out by asparagine endopeptidase or cathepsin family members. This initial cleavage event is followed by a trimming event that is solely cathepsin mediated but also required for optimal receptor signaling. The dual requirement for asparagine endopeptidase and cathepsins is observed in all cell types analyzed, including mouse macrophages and dendritic cells. Importantly, TLR7 and TLR3 are processed in an analogous manner, suggesting that proteolysis is a regulatory strategy that has been adopted along side the ability to recognize nucleic acids as ligands. Finally, conditions that prevent receptor proteolysis, including forced surface localization, render the receptor non-functional. We propose that ectodomain cleavage represents a strategy to restrict receptor activation to endolysosomal compartments and prevent TLRs from responding to self nucleic acid.