The Anfield side offered to pay a larger proportion of the 23-year-old's £115,000 a week wages, to beat Arsenal's offer.
Report says Sahin had privately expressed a preference for the north London club. But the deal stalled when Real and Arsenal could not agree a £14m option to buy the player at the end of the loan.
Liverpool and Real Madrid then agreed a deal, with Sahin's agent meeting Liverpool officials earlier in the week to agree terms.
Real Madrid manager Jose Mourinho had given the go ahead for Sahin to move to the Premier League after the midfielder struggled to make an impression at the Bernabeu since a move from Bundesliga champions Borussia Dortmund last summer.
Sahin signed a six-year deal with the Bernabeu side but made just 11 appearances for them last season as they won the Spanish league title.
Aug. 25, 2012.
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