It is also the first UK credit union to release a smartphone app, which it says will give it a "similar model to payday lenders".
The union, established in 1989 for all police employees, has 8750 members and has teamed up with an 'ethical insurer' to offer the protected loan service.
Cuna Mutual, the world's largest insurer to credit unions worldwide, has developed a product that makes the credit union, not the member, liable for waiving payments when a borrower falls ill, backed by a business-to-business insurance policy, which transfers the risk off balance-sheet.
It means that if a Scottish Police Credit Union member is unable to work due to an accident or sickness, they contact the union and payments are waived for up to 18 months. No arrears are built up, no credit scores are affected, and the loan continues to be paid off. Loan interest rates are said to be unaffected.
Cuna Mutual says it is a "fair, straightforward and ethical product " to counter the fall-out from the mis-selling of traditional payment protection insurance, "primarily by shifting the onus onto the lender to indemnify their loan rather than the customer insuring their ability to repay" if they become "unemployed due to sickness or redundancy".
Its research found that following the blanket ban on some PPI products caused by widespread industry mis-selling, "86% of Scottish citizens are now without any protection against loss of earnings".
The Scottish Police Credit Union has also released the sector's first smartphone app, saying: "This will mean that in a similar model to payday lenders, those wishing to borrow funds can access a loan calculator and apply for loans 24 hours a day."