Police were deployed to direct hundreds of mourners at the funeral in the small town of Tahmoor on Friday.
Mourners made their way down a road festooned with coloured balloons in front of St Anthony's Catholic Church for the service.
The hearse carrying the teenager's coffin arrived at the church just after 1pm.
A memorial card handed to those in attendance read "Lily's beautiful spirit and soul will transcend time and the ray of light she shone each day will now shine down through the stars".
The farewell comes a day after the funeral of 15-year-old crash victim Tyrese Bechard in Picton.
The pair died with school friends Summer Williams, 14, Gabrielle McLennan, 15, and Antonio Desisto, 16, when the ute they were in crashed on September 6.
All the victims attended Picton High School, where face-to-face learning has been replaced with online classes until Monday so students can attend the funerals.
The services of Gabrielle McLennan, Summer Williams and Antonio Desisto will follow in coming days.
The victims are being remembered with balloon and streamer tributes in the area, with a different colour dedicated to each teenager.
A mayoral relief fund has also been established to offer financial support for the victims' families.
The driver of the ute Tyrell Edwards, 18, is in custody after facing court last Thursday on five counts of dangerous driving occasioning death.
The tragedy has prompted renewed warnings from authorities for care on the road, and sparked calls for reform of laws around repeat driving offences.
