The 20-year-old moved to the Premier League from Sporting Lisbon B in the summer, but has failed to make a first-team appearance at Anfield.
The centre-back will now spend the remainder of the campaign at Granada, who he has branded a side "that plays good football and has ambitions".
"I chose Granada because I know I'll have opportunities to play here. They're a team I like, that plays good football and has ambitions," he told reporters at a press conference.
"At the start of the season I played some friendly games, then I couldn't get to play every week, but I'll be at 100% soon. Liverpool are a great team, they have great players and it's difficult to get a chance, but I hope I'll get to play more games next season."
Ilori could make his debut this weekend against Real Madrid.