Declan Bonner's men will now play Dublin in the All-Ireland semi-finals on Saturday.
It was Donegal's first provincial Under-21 title since 2010.
Derry had to play most of the second half without dismissed defender Oisin Duffin and two late goals put a gloss on Donegal's margin of victory.
Donegal were 0-4 to 0-1 up by the 10th minute, with Lorcan Connor converting a couple of frees and Michael Langan landing a '45.
But the Oak Leafers found a way to penetrate a packed defence, and went level through Conor Doherty, after Danny Tallon had converted three frees.
Goalkeeper Ben McKinless had to be alert to keep out a Tony McCleneghan shot as Donegal pressed, but the Oak Leafers went ahead for the first time in the 21st minute when Shane McGuigan sent over a superb point.
Donegal finished the half in spectacular fashion, with 1-4, including two wonderful Jason McGee scores.
Jamie Brennan's dribble along the left wing set up a goal for Connor, sending his side in with a 1-8 to 0-7 interval lead.
Donegal led by 1-8 to 0-7 at the break, and increased the advantage with scores from Connor and Cian Mulligan, who opened out a six-point lead.
Derry lost their most dangerous attacker Shane McGuigan to a black card, and soon afterward were reduced to 14 men when full-back Duffin, who had earlier been booked, was sent off on black/red cards.
Langan and Connor drilled frees between the posts, but Derry worked hard to create scores for Cathal Mulholland and Peter Hagan.
And when skipper Niall Keenan made a brilliant goal-line stop to deny Brennan, before racing upfield to slot over a point, they were still in the hunt, training by five points with 10 minutes to play.
However, the numerical handicap was soon to become too much for a courageous Oak Leaf side to handle.
Donegal were able to pick holes in the defensive set-up of a tiring opponent, and Carroll and Conor Morrison went through for fisted scores.
Substitute O'Donnell sprinted in for a solo goal with five minutes to play, and midfielder Carroll punched home his side's third in stoppage-time.
Goals by Lorcan Connor, Ethan O'Donnell and Michael Carroll helped Donegal beat 14-man Derry 3-17 to 0-13 in Monday night's Ulster Under-21 football final.