The Tercel is a subcompact manufactured from 1978 to 1999 across five generations, in five body configurations — sized between the Corolla and the Starlet. Manufactured at the Takaoka Plant in Toyota City, Japan, and sharing its platform with the Cynos (aka Paseo) and the Starlet, the Tercel was marketed variously as the Corolla II — and was replaced by the Echo in 2000.

The name "Tercel" derives from the Latin word for "one third" as the Tercel was slightly smaller than the Corolla — much the way "tiercel" refers to a male falcon, which is one-third smaller than its female counterpart.

The Tercel was introduced in Japan in 1978, and in the United States in 1980; it was the first front-wheel drive vehicle ever produced by the automaker. Toyota named it the Corolla Tercel, hoping that the Corolla image — long known for quality and durability — would bring buyers to the new model. The Tercel's front-wheel drive design ensured that the vehicle delivered maximum interior space in a small package. It was originally sold as either a two-door coupe or a three-door hatchback, with each model powered by a 1.5L SOHC four-cylinder engine producing 60hp (45kW). Transmission choices were either a four- or five-speed manual or a three-speed automatic.

The new front-wheel drive design in the Tercel, unlike their previous front-wheel drive designs, did not have the engine transversely mounted. Rather, the engine was mounted longitudinally, such that the transmission was mounted under the floorpan, as was standard in a rear-wheel drive car. Unlike a rear-wheel drive car, the transmission had a ring and pinion gear on the front part of the transmission, underneath the engine. Halfshafts then extended from the transmission to the front wheels.

For 1981, the Corolla Tercel received a new 62hp (46kW) A engine for improved power and drivability and lower emissions. Choice of bodystyles increased as well, with the addition of a four-door sedan.

Toyota redesigned the Tercel for 1983 and renamed the car simply "Tercel". The second generation Tercel was available in three- or five-door hatchback models or a four-door station wagon. The station wagon, known in Japan as the Sprinter Caribbean, was also available with either front- or four-wheel drive. The four-wheel drive model could be equipped with six-speed manual transmission, and could be shifted from two- to four-wheel drive without coming to a stop. The sixth gear it carried was an "Extra Low" (EL) first gear, a standard transmission gear with a very low (4.71:1) gear-ratio. The EL gear generated a 17.6:1 final drive ratio, giving the driver the torque needed to extract the vehicle from conditions which otherwise may have trapped it. Because of its low gear-ratio, it was suitable only for very low-speed use on loose or slippery road surfaces (such as snow, gravel, or sand.) Also included with the four-wheel drive model is a inclinometer above the radio and air conditioner that measures the tilt of the car. Standard front-wheel drive vehicles (and four-wheel drive wagons not equipped with the six-speed manual transmission) came with either a three-speed automatic or a five-speed manual transmission. The least expensive model, the base three-door, was available with a four-speed manual only.