Born on 28 February 1857 at Ambrières, Loisy was put into the ecclesiastical school of Saint-Dizier at four years old. He decided for the priesthood and was educated within the Catholic system, from 1874 to 1879 at the Grand séminaire de Châlons-en-Champagne; he entered the Institut Catholique de Paris in 1878/1879. Prior to his ordination to the subdiaconate, he had experienced doubts regarding the soundness of the Catholic faith. After an illness he returned to the Institut and was ordained a priest on 29 June 1879. Initially assigned parish work, in 1881 he requested to be reassigned to the Institut to complete his baccalauréat in theology. That autumn he became instructor in Hebrew. He took additional courses in Hebrew with Ernest Renan at the Collège de France. He was also influenced, as to biblical languages and textual criticism, by the Abbé Paulin Martin, and as to a consciousness of the biblical problems and a sense of form by the historical intuition and irony of Abbé Louis Duchesne. He took his theological degree in March 1890, by the oral defense of forty Latin scholastic theses and by a French dissertation, Histoire du canon de l'ancien testament, published as his first book in that year. By the time he took a course at Saint-Sulpice in scriptural interpretation, he was already disillusioned with the Church's belief in the virgin birth and resurrection.

Some of his work appeared in the bi-monthly L'Enseignement biblique, a periodical written throughout and published by himself. In November 1893, Loisy published the last lecture of his course, in which he summed up his position on Biblical criticism in five propositions: the Pentateuch was not the work of Moses, the first five chapters of Genesis were not literal history, the New Testament and the Old Testament did not possess equal historical value, there was a development in scriptural doctrine, and Biblical writings were subject to the same limitations as those by other authors of the ancient world. This resulted in Loisy's dismissal from his teaching position. A few days later Pope Leo XIII published the encyclical Providentissimus Deus, which indirectly condemned Abbé Loisy's and Mgr d'Hulst's position, and rendered the continued publication of consistently critical work so difficult that Loisy himself suppressed his Enseignement at the end of 1893. He was subsequently appointed chaplain to a convent in Neuilly, a post from which he resigned in 1899, to be appointed lecturer at the École pratique des hautes études, a secular academic institution.

In 1902, he started to pay attention to Adolf von Harnack's Das Wesen des Christentum. Harnack believed that the essence of Christianity was the relationship between individual and God, making an organized church a largely unnecessary creation. Loisy disagreed with the idea that the organized church was unnecessary, but the nature of his disagreement brought him controversy. From 1901 to 1903 he wrote several works that would be condemned by the Church. These include La Religion d'Israël, Études évangéliques, L'Évangile et L'Église, Autour d'un petit livre, and Le quatrième Évangile. His 1908 Les Évangiles Synoptiques would cause his excommunication. In his works he argued against Harnack, trying to show that it was necessary and inevitable for the Catholic Church to form as it did. He also argued that God intended this and compared his own ideas on this to those of Cardinal Newman. Although L'Évangile et L'Église in particular was condemned by Cardinal Richard, Pope Leo consistently refused to interfere directly. It was his successor, Pope Pius X who would later condemn these works.

Cardinal Sarto became Pope Pius X on 4 August 1903. On 1 October, Loisy published three new books, Autour d'un petit livre, Le Quatrième Évangile and Le Discours sur la Montagne (a fragment of a proposed enlarged commentary on the Synoptic Gospels). Autour consists of seven letters on different topics addressed to church Leaders and friends. On 23 December the pope ordered the publication of a decree of the Index of prohibited books, incorporating a decree of the Inquisition, condemning Loisy's Religion d'Israël, L'Évangile et l'Église, Études évangéliques, Autour d'un petit livre and Le Quatrième Évangile. On 12 January 1904 Loisy wrote to the Vatican Secretary of State, Cardinal Merry del Val, that he received the condemnation with respect, and condemned whatever might be reprehensible in his books, whilst reserving the rights of his conscience and his opinions as an Historian. Since the Holy See was not satisfied, Loisy sent three further declarations to Rome; the last, dispatched on 17 March, was addressed to the pope himself, and remained unanswered. At the end of March Loisy gave up his lectureship, as he declared, on his own initiative. In April 1907 he returned to his native Lorraine, to Ceffonds (near Montier-en-Der), and to his relatives there.

In July 1907 the Holy Office (after Vatican II renamed as Congregation for the Doctrine of the Faith) issued a decree, signed by Pius X, entitled Lamentabili sane exitu (or "A Lamentable Departure Indeed"), which formally condemned sixty-five modernist or relativist propositions concerning the nature of the Church, revelation, biblical exegesis, the sacraments, and the divinity of Christ. This was followed by the encyclical Pascendi dominici gregis (or "Feeding the Lord's Flock"), which characterized Modernism as the "synthesis of all heresies". The documents made Loisy realise that there was no hope for reconciliation of his views with the official doctrine of the Church. He made a comparative study of the papal documents to show the condemned propositions in his own writings. He also asserted as true various of his earlier New Testament interpretations, which previously he had formulated in conditional form. In his journal he wrote:

The Church authorities were not slow to act. On 14 February 1908 Mgr Amette, archbishop of Paris, prohibited his diocesans to read or defend the two books, which "attack and deny several fundamental dogmas of Christianity," under pain of excommunication. Loisy was excommunicated vitandus on 7 March 1908.

After his excommunication he became a lay intellectual. He was appointed Chair of History of Religions in the Collège de France in 1909 and served there until retiring in 1931. In that post, he continued to develop his philosophy, describing the Christian religion as a humanist system of ethics rather than Divine. He also developed his studies of early religions and their influence on Christianity. He never recanted, and died in 1940 in Ceffonds.