The 35-year-old, who suffered a heartbreaking defeat in the 2014 final when he held a match point against Bulgarian Grigor Dimitrov, this time saved one in a tense tiebreak shootout before toppling the Croat.
Fourth seed Cilic also saved two match points, but at the third time of asking crowd favourite Lopez could finally celebrate a sixth career title after Cilic pulled a forehand into the tramlines.
"I can't believe that I finally won it, I've been waiting for 15 or 16 years to hold this trophy," an emotional Lopez, three times a Wimbledon quarter-finalist, said on court.
"I thought that at the end of the tiebreak after losing match points I wouldn't make it but I managed to do it.
"It was tough to put that (match point in 2014) out of my mind so it was difficult to handle my nerves but I managed it."
Lopez, yet another male player who appears to be getting better with age, is the oldest winner of the prestigious Queen's Club championship in the professional era.
He did it by defeating Stan Wawrinka, Tomas Berdych, Grigor Dimitrov and Cilic -- ranked three, 14, 11 and seven in the world rankings.
"It's the best week of my career, which is crazy when you're 35," said Lopez, who joins a celebrated list of former champions including the likes of John McEnroe, Pete Sampras, Boris Becker, Andy Murray and fellow Spaniard Rafael Nadal.
The match was decided in an epic tiebreak with both players showing remarkable grasscourt skills.
Cilic brought up match point with an ace but Lopez saved it when he cut off the Croat's attempted pass with a stretching volley. Lopez then had a match point only for Cilic to snuff it out with his 22nd ace of the match.
Lopez performed miracles to scramble a point at 7-7 and serve for the match but Cilic responded with a nerveless volley after an exchange of blows from the baseline.
A 19th ace for Lopez brought up another match point and this time Cilic could not reply.
(Reporting by Martyn Herman; Editing by Ian Chadband and Brian Homewood)
