The explorers Hume and Hovell arrived at Lara on December 16, 1824, believing that they had reached Westernport Bay. They recorded that the Aboriginals described the bay as Jullong and land as Corago, suggesting origins for the names of Geelong and Corio.
The area was originally named Kennedy's Creek but was also given several different names including Duck Ponds, Hovell's Creek, Cheddar, Swindon and Lara Lake. The area of Lara was no more than a few farms at this time.
The railway though the town was opened in 1857 along with the local railway station, with several subdivisions then announced. A Post Office opened on March 1, 1858 as Duck Ponds (Hovell's Creek in 1872 and finally Lara in 1884). The population grew to a few hundred by 1890, and several facilities like schools and churches were built, but town water did not extend to the town until 1947.
In January 1969, 17 people were killed in bushfires which ravaged Lara. Most of the victims were trapped by the fast-moving grass fire while travelling on the Princes Highway.
Several scenes from the 1979 feature film Mad Max were shot on location around Lara, as well as several scenes from the Australian Broadcasting Corporation mockumentary , in which the town was renamed to the fictional "Dunt".