Yes, it makes a hugh difference. Think about it...what if you only had four counts/revolution, then the motor could move 90 degrees without the system even knowing it. Same motor same settings but now with a 2000 counts/rev (500 lines) encoder, the 90 degree displacements now results in an error of 500 counts. This give the servo-loop a lot more "information" to work with which helps in stabalising the loop.

If that is a 25 line encoder (100cpr) then that may be a big part of your problem. Trying 'my' values with that motor/encoder probably isn't going tp help you one bit. If possible try with a higher resolution encoder.

/Henrik.