How do character "secrets" work — won't the AI just blurt them out?

No, and that's the point of the field. Open a book, click "Codex", expand a character card and fill in "Secrets — what they hide". The AI receives the secret with a strict rule attached: it must COLOR the character's behavior in every scene (hesitations, avoidances, small tells) but must NEVER be stated openly until the story itself reveals it. So the secret creates tension on the page without spoiling itself in chapter two. When your manuscript finally reveals it, the AI can write about it freely from that point on.