The town was founded as Lohn by Liudger, the first Bishop of Münster about the year 800. About 985 Gescher was split form Lohn, which in turn (1231) split into Südlohn (literally "South-Lohn") and Nordlohn (literally "North-Lohn"). The name Stadtlohn (literally "Town-Lohn") is first mentioned in 1389 after the small town Nordlohn was secured by a moat, a defensive wall and gates and gained the town rights. About 1406 Stadtlohn was burned down by CountHeinrich I of Solms-Ottenstein because he feuded with the bishop of Münster. Bishop Heinrich III of Münster verified its town rights in 1491.
In 1584 Stadtlohn was pillaged by the troops of Duke Ernest of Bavaria and again in 1588 by Dutch soldiers. In 1591 Spanish soldiers attacked the town. For a few months of 1598 Spanish troops were stationed in the town during the Eighty Years' War. In 1611 a serious fire destroyed 225 of 235 houses.
In World War II, Stadtlohn was hit by bombs as early as 1940 and 1942, but the damage was limited. In March 1945, however, Stadtlohn was affected by two massive allied airstrikes that destroyed 86% of the town. About 600 inhabitants lost their lives. On March 31, 1945 British forces marched into the town.