“I had the option of coming to Palace and I thought that it would be great for me,” he told the Palace website.
“I live not too far away, I was born in Lewisham and Palace is good club so I thought it’s a good chance to play here and be a part of the team.
“They have a very strong team and I’d like to be a part of that this season.”
Loftus-Cheek has made 32 appearances for Chelsea in the last three seasons, had also been of interest to Southampton and newly-promoted pair Newcastle United and Brighton & Hove Albion.
The 21-year-old becomes new Palace manager Frank de Boer’s first signing of the summer window.