The 29-year-old left-sided player, who can play as a wing-back or in a more advanced midfield role, has been a familiar figure in the Lyon squad this season without nailing down a regular starting role.
He has managed five league goals in the current campaign, despite starting just seven games, but the move to Schalke had been in the offing and Lyon on Thursday confirmed it had been finalised.
The French club said in a statement on their website: "The talented left-footed Brazilian Michel Bastos has been loan to Schalke for 18 months."
Schalke will have the option at the end of the loan deal to buy Bastos from Lyon, who stand second in the Ligue 1 table.
Lyon's decision to offload Bastos comes as part of a policy to reduce their wage bill and give young players a chance to come through.
Lyon also expected Jimmy Briand to join Monaco on loan on Thursday but the deal fell through when personal terms proved a stumbling block.