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The surrender of Granada was seen as a great blow to the Arabs and a triumph to the Europeans. Other European states offered their sincere congratulations to Ferdinand and Isabella, while Arab writers reacted with despair. In Castile and Aragon, celebrations and bullfights were held. People rejoiced in the streets.

The treaty's terms for Granada's surrender were quite generous to the Muslims, considering how little they had left to bargain with. They were similar to the terms offered to towns which surrendered earlier, when the outcome of the war was in doubt. For three years, Muslims could emigrate and return freely. They were allowed to keep weapons, though not firearms, a provision that however was to be annulled a month later. No one would be forced to change religion, not even former Christians who had converted to Islam. Boabdil was offered money and the rulership of a small principality in the mountainous Alpujarras, an area that would have been difficult to control in any case. At first, most of conquered Granada was treated respectfully and was therefore predominantly stable for seven years, though the Alhambra Decree of 1492 expelled the Jews that were not converso Marranos.

King Boabdil soon found his position intolerable. He left for Morocco in Oct 1493, where he would die some forty years later. Eventually, Castile started to revoke some of the more tolerant attributes of the treaty. This initiative was led by Archbishop Cisneros, who ordered mass conversions, the burning of valued Arabic manuscripts and other measures detrimental to the Muslims (and Jews).

This sparked a revolt that ended in many Muslims being forced to choose between baptism, exile, or execution. Tensions from then onward would remain high, and Castile was obliged to maintain a large military force in Granada to deter future revolts. Isabella also strengthened the Spanish Inquisition, and Ferdinand brought the Inquisition to Aragon where previously it had not held power.

Castile was the main beneficiary of the war, as it had also spent by far the majority of the money and manpower to prosecute it, and completely annexed Granada. The conquest of Granada meant little for Aragon's strategic position, but it did help secure Castilian support in Italy and France, where Aragon's interests lay.

Increasing oppression of the Moors—now known as Moriscos or "New Christians"—led to the Rebellion of the Alpujarras (1568–71). After the defeat of the Moors, which was not easy, almost all the Moriscos of the former Kingdom of Granada were exiled to other parts of Spain.