IIRC the Erlang VM does the second (schedule on function call). Since Erlang is a functional language and loops are done via recursion, this works out fine.
Yes, on every function call, also some internal functions implemented in native code are instrumented with those checks. On average thread is switched out after about 2000 "reductions" as they are called. Also there's an optimization, where if you send something to another thread and you are waiting for reply, VM switches instantly to the other thread, which makes some message sending equivalent to a simple function call.