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.