Idiopathic pulmonary fibrosis (IPF) is a major cause of respiratory failure in critically ill patients and common outcome of various lung interstitial diseases. Its mortality remains high, and no effective pharmacotherapy, in addition to artificial ventilation and transplantation, exists. As such, the administration of mesenchymal stem or stromal cells (MSCs) is currently investigated as a new therapeutic method for pulmonary fibrosis. Clinical trials on MSC-based therapy as a potential treatment for lung injury and fibrosis are also performed. MSCs can migrate to injured sites and secrete multiple paracrine factors and then regulate endothelial and epithelial permeability, decrease inflammation, enhance tissue repair, and inhibit bacterial growth. In this review, recent studies on stem cells, particularly MSCs, involved in alleviating lung inflammation and fibrosis and their potential MSC-induced mechanisms, including migration and differentiation, soluble factor and extracellular vesicle secretion, and endogenous regulatory functions, were summarized.