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Ecclesiastical lords have mainly ruled the castle over the centuries. From its beginnings (most estimates suggest work began in the 11th century) until the 19th century, it belonged to the bishops of Freising together with the wider territory surrounding it. During these first medieval centuries the bishops gained, through donations and acquisitions, the largest and most unified territory in the central Slovenia region - the region of Kranjska. Owing to the privileges of the church, they also kept the territory more or less uniform and stable, until the age of the Enlightenment and the fall of feudalism. During this time, the castle of Škofja Loka represented the central point of Freising's landed property in the Kranjska region.
Owing to the fact that the castle stood at the meeting point of the two streams of the river Sora and thus in the exact place where two valleys unite, it established a dominant position for medieval trade and the development of the cottage industry. This led to the growth of the town beyond the castle, which was at that time also the property of the bishops.
A fortress above the present castle as well as an additional castle nearby were built for its defence, but were both badly damaged in the great earthquake of 1511 and soon abandoned so that only their ruins may be seen today. On the contrary, the present castle was almost completely renovated after the earthquake and thus acquired its basic shape, with three tracts and a large inner courtyard as early as the first decades of 16th century. Two defense towers in the corners of the south tract were also made during that period. In the inner courtyard the design of the massive high four-angled tower which used to stand there can still be seen. The tower was built after the earthquake, but was pulled down at the end of the 19th century.
The castle has played a major role during certain periods of Slovene history. It was the centre for peasant rebellions several times and also the location for the burning of Protestant books and the imprisonment of heretics. The castle was renowned for the cruelty of its jails which the great Slovene writer Ivan Tavčar vividly depicted in his book Visoška kronika (Chronicle of Visoko).
The castle was nationalized during the Napoleonic period and used for bureaucratic purposes for seventy years. Within twenty years it had changed proprietors and was sold to a female monastic order called Uršulinke. They made most of the late changes to the castle, pulling down the courtyard tower and west defense wall and connecting the castle to a nunnery.
The Germans occupied the castle during the Second World War. Following this, it served as a hospital and house of correction, until the museum of Loka (Loški Muzej) was eventually founded in its grounds. With its diversity of collections, the museum exhibits archeological, historical, ethnological, and cultural images of the wider Škofja Loka territory throughout history. The museum also regularly hosts various art exhibitions and concerts.