Toral's loan spell at Granada ended after he had only made six appearances in all competitions this season.
The 21-year-old played regularly in previous season-long loan spells with Brentford and Birmingham City in the Championship and now joins the Scottish Premiership side until the end of the season.
Toral worked with Rangers manager Mark Warburton during his campaign at Brentford in 2014-2015.
"I'm very, very happy to be here and the stadium just shows how big the club is - I really can't wait to get started," Toral told Rangers TV.
"I think knowing the manager has played a big part in it and also the connection the gaffer has with Arsenal.
"It's happened before with Gedion [Zelalem], it happened at Brentford before as well - I think it's very important that I know Arsenal are very comfortable with me moving here.
"I really enjoyed my time at Brentford with [Warburton] so that was in my mind to make this decision.
"The style of play is similar to the style of play and philosophy we have at Arsenal, so I think that is a big part as well."
Arsenal boss Arsene Wenger confirmed last weekend that the club were working on sending Toral to Rangers and felt the club would suit him.
Toral, a former Barcelona youth player, is yet to make a competitive appearance for the Gunners.
Rangers sits second in the Premiership, 19 points adrift of leader Celtic and just two ahead of Aberdeen.