Toyota redesigned the Tercel for May 1982. The "Corolla" part of the name was dropped, becoming simply "Tercel" in all markets. The second generation, L20 series, was a more modern and angular shaped model, comparing to its predecessor. It was available in three- or five-door hatchback models or a four-door station wagon, and also as a four-door sedan in Japan. The station wagon, known in Japan as the Sprinter Carib (Japanese: Toyota Sprinter Carib, short for "Caribou"), was introduced in August 1982. The wagon was also available with four-wheel drive (front-wheel-drive wagons were only available in select markets). In Japan, a four-wheel-drive sedan was also available, it too remained in production alongside the wagon version even after the introduction of the third generation Tercel. 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 four- or five-speed manual transmission. The four-speed manual was reserved for the very simplest version in North American markets.
As only the first two generations were sold officially in Europe, this was the last generation of the Tercel series available there, with either the hatchback or station wagon bodywork. In Japan, power outputs were as follows:
1295 cc 2A-U: 75 PS (55 kW) at 6000 rpm
1452 cc 3A-U: 83 PS (61 kW) at 5600 rpm (9.0:1 compression, 82.05–86.05)
1452 cc 3A-U: 85 PS (63 kW) at 5600 rpm (9.3:1 compression, 86.03–88.02)
1452 cc 3A-HU: 86 PS (63 kW) at 6000 rpm (variable venturi carburetor, 9.3:1 compression, 82.05–84.08)
1452 cc 3A-SU: 90 PS (66 kW) at 6000 rpm (twin variable venturi carburettors, swirl intake version, 84.08–88.02)
North American Tercels were all fitted with the 1.5-litre engine, producing 63 hp (47 kW) at 4,800 rpm. In Europe, both the 1.3 (65 PS or 48 kW at 6000 rpm) and the 1.5 (71 PS or 52 kW at 5600 rpm) were available. As with the earlier generation, engine and transmission were still mounted longitudinally, and the arrangements were the same. In some markets, engines received minor improvements, such as reformulated combustion chambers - to improve emissions and fuel economy -, higher compression ratios, and new auxiliary devices for the carburettor assembly.
The four-wheel-drive models (chassis code AL25, only with the 1.5 engine) 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. It was only available when in four-wheel drive, and because of its low gear-ratio it was suitable only for very low-speed use. Also included with better equipped four-wheel-drive models was an inclinometer above the radio/air conditioner that measured the tilt of the car.
The new Tercel 4WD was built from existing pieces in the Toyota inventory. The engine, transaxle and front-wheel-drive system was from the existing Tercel. The coil-sprung, live rear axle was taken from the rear-wheel drive Corolla. The only part specifically designed for the new Tercel 4WD was the transfer case, built into the transmission. This gave the driver greater versatility than was possible on a purely front-wheel-drive vehicle, as it provided three different power arrangements. Normally, the car would be operated with front-wheel drive. When the driver pulled the 4WD selector lever back into four-wheel drive, or pressed a button on the gear selector for the automatic transmission, front and rear differentials were driven at the same RPM via a direct mechanical coupling. There is no conventional center differential, so the four-wheel-drive system could be used only on loose or slippery road surfaces (such as snow, gravel, or sand); otherwise the drivetrain would experience severe wear, and handling would be compromised. The third power option (which was only available on the six-speed manual) was low range. This isn't the same as the low-range power option found in a truck or conventional SUV, as the Tercel lacked a high-range/low-range transfer case. When the lever was placed in four-wheel-drive mode it became possible to down shift the vehicle from first to EL (extra low).
1985 saw minor changes to gear ratios and to the grille design, and the interior was updated in 1986. The Tercel wagon (and four-door sedan in Japan) continued with the same design until February 1988 (when the Sprinter Carib was replaced by a larger, Corolla-based design), while the sedans and hatchbacks moved on to the newer design.