The differential allows the drive wheels to rotate at different speeds in turns without the wheel binding or hopping. If you have a rear-wheel drive vehicle, thedifferential is on the rear axle. You've seen that bulge in the middle of the axle when you're behind a truck – that's the differential.
The gear oil in the rear differential lubricates and prevents wear in the rear end gears. Failure to change the differential oil regularly will have the same consequences as never changing your engine or transmisison lubricants. Over time, excess friction will cause metal to wear away, increasing clearance between gears. Once that happens, it's only a matter of time before the gears bind up and self-destruct.
The rear differential's job is to allow the drive wheels to turn at different speeds while cornering. When you turn, the inside wheel traverses a smaller circle than the outside wheel. The engine's power flows along the path of least resistance -- generally to the inside wheel, since the vehicle's weight transfers to the outer wheel while cornering.
The rear differential is located in a centered position on the rear axle of a vehicle, between the two rear tires. It's easily recognizable as the bulging center-section on most "live" axles. It has a drain plug to release onld fluid, and most have a separate plug in the top for checking fluid level and refilling it after draining.
changing differential fluid is generally fairly straightforward. Drain the old oil out, reinstall the drain plug, pump new oil into the fill plug until it won't take anymore. Most differentials take something in the range of 75W-90 gear oil, a much thicker variant of the oil in your engine. However, many performance limited-slip differentials call for a very specific fluid with specific additives, or even a silicone-based fluid in the case of viscous-coupling differentials. Know what you need before you drain.
Differential oil gets contaminated by metal shavings and other grime over time, and loses its ability to lubricate and provide a cushion between meshing gears. Ironically, the worn gears and thin fluid could theoretically boost your performance and fuel economy -- until the differential explodes. You can recoup this loss using a high-end synthetic differential oil designed for racing. These oils are expensive, but one change will probably last you the next 100,000 miles, and you can maintain your performance and fuel economy perks without sacrificing differential life.