Everton hold the option to make the deal permanent at the end of the season.
Coady joined Wolves from Huddersfield Town in the summer of 2015 when they were in the Championship and he has been instrumental in their rise to become a stable Premier League club.
Coady's arrival at Goodison Park is timely for Everton boss Frank Lampard, who lost defenders Ben Godfrey and Yerry Mina to injuries in the opening Premier League game against Chelsea over the weekend.
Coady was an unused substitute as Wolves suffered a 2-1 defeat at Leeds United.
The 29-year-old, who started his career at Liverpool, is Everton's fourth summer signing after James Tarkowski, Ruben Vinagre and Dwight McNeil.
"It's incredible to join Everton," Coady, who has been capped 10 times by England, told evertontv.
"As soon as I heard the interest, from the manager but also the football club itself, I really wanted to be part of it straight away. I'm over the moon to join.
"I've grown up around the city, I know the football club, how big this club is and what it means to the supporters. I'm someone who was desperate to come here, to play for this club. I've got family and friends who are massive Evertonians.
"I'm here to give absolutely everything I've got for this football club. It's important I work as hard as I can to help my team-mates, help the club move forward and make people proud."
Everton boss Lampard added: "We are delighted to bring a player of Conor's quality and vast experience to Everton, and he fits into how we want to play as a team.
"As well as being one of the Premier League's most reliable defenders and an England international, his leadership skills will be of huge benefit to us, too."
