Loretto, originally a Soo Line railway village, was founded in 1886 and settled by German and Dutch immigrants. Loretto was named for a Roman Catholic mission for refugees of the Huron Indians near Quebec, Canada, called Lorette, and for the village of Loretto, Kentucky, where a society of Catholic "Sisters of Loretto at the Foot of the Cross" was founded in 1812. The original source of the name is Loreto, a small town in Italy, which has a noted shrine of pilgrimage.
Some of the early businesses included Koch's Meat Market, Van Beusekom's General Store, The Dutch Mill Dairy, Weidner's Saloon, Loretto Feed and Seed Company, Pettit's Bar, Murphy's Blacksmith, Standard Oil, Conoco Oil, Fullerton Lumber, and the State Bank of Loretto. The general store is now an apartment building and the old State Bank of Loretto building, built in 1910, now houses a landscaping business. Sts. Peter and Paul Church, built in 1903, is still in use and its former convent now serves as an area Eucharistic Perpetual Adoration Chapel.
The City was incorporated in 1940. The first mayor was Albert Van Beusekom. The Loretto Volunteer Fire Department started in 1948 and still proudly serves the City and surrounding area. Town team baseball, started in the 40s, continues to play today. The Loretto Lions Club, established in 1969, is also still active in the community.