Right-back Philipp Degen completed a move to the Merseysiders in July as competition for Finnan, and Benitez also has Alvaro Arbeloa, who can play in his position.
But Finnan has made his exit, having helped Liverpool beat AC Milan in the 2005 Champions League final.
Espanyol sporting director Paco Herrera said Finnan was just the club needed after seeing Pablo Zabareta depart for Manchester City last week.
"He brings balance to the right side. He doesn't make mistakes, gives good passes, defends well and is correct in everything he does," he said.
"He is always worth a 'seven' in ratings, he doesn't call attention to himself, but the coach and the squad will appreciate him."
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