Coentrao joined Real Madrid from Benfica in the summer of 2011 and helped Los Blancos to their last league title in his first season at the club.
He was also a part of the squad that won the Champions League in 2013-14, playing an hour of the 4-1 final win over arch-rivals Atletico Madrid.
Both Real Madrid and Monaco confirmed the loan on Wednesday, with the French side saying in a statement: “AS Monaco is pleased to announce… an agreement in principle with Real Madrid for the loan of Portuguese international Fabio Coentrao.
“The left back will pass the medical examination on Thursday before engaging with the Monegasque club for the 2015-16 season.”
Coentrao is a product of the Rio Ave academy in his native Portugal and has been capped 50 times at senior international level.
Monaco will look towards a productive domestic season in Ligue 1, after their Champions League dreams were ended by Valencia at the play-off stage on Tuesday night.
The principality club finished third in the league last season, and this time around have had a mediocre start with two draws and a win.