BMW E36 Differential Rebuild DIY – Steps, Tools, and More

Owning and driving an older car has its perks. For one, you don’t need to deal with all the electrical components in modern cars, but there are a few downsides as well – it’s hard to come across new OEM parts. Regular maintenance is usually not a problem, but when it comes to certain mechanical parts such as the differential, it’s much easier to do a complete rebuild. This is especially true on a BMW E36

We’ll cover all the necessary steps of a BMW E36 differential rebuild, what tools you’ll need, and a few tricks to make the process much easier.
bmw e36 differential rebuildArticle updated on 05/11/21. Original publishing date 20/06/18

Is It Worth Doing a BMW E36 Differential Rebuild?

The differential isn’t one of the car parts that need much attention. Most cars, if maintained properly, won’t need a differential rebuild or replacement, but it’s still good to know what your options are if you suspect your differential is failing.

A few things can go wrong with a differential, and most of these things don’t require a full differential rebuild. Replacing a gasket or bearings is often the simplest fix for a differential that is showing symptoms of wear. In many cases, the lack of gear oil is what’s causing all your issues. Swapping the gasket and replacing the oil usually sorts this out. If this doesn’t help to fix your E36 diff, you have two choices – a differential rebuild or getting another used one.

When it comes to buying a used differential for your BMW E36, even if you find one that’s in good condition, it’s only a matter of time before it fails as well. Finding a used diff is more affordable than doing a complete differential rebuild, but it comes with a higher risk.

A full rebuild is more than worth it if you plan on keeping your E36 in the long run. The full BMW E36 differential rebuild will end up costing around $1500-$2000, but you’ll know that every single part of the diff is working properly and that you won’t have any issues with it down the line.

When Is A Differential Rebuild Necessary?

There are several signs to look for if you’re suspecting your E36 needs a differential rebuild. The first and most common one is a whining noise coming from the back of your car.

If you act on time and inspect the diff as soon as you start hearing the noise, you might avoid doing a complete rebuild. A new gasket to stop the differential fluid from leaking, and some new fluid will most likely fix your problem.

When you feel start experiencing stronger vibrations while driving, or you feel that you can’t control your car around corners, that could indicate that a more substantial intervention is needed. In many cases, you’re looking at a rebuild.

Even though it’s a costly procedure, it’s a much better alternative to getting a used differential fitted to your BMW E36. The good thing is, if you have the right set of tools and you’re willing to get your hands dirty, you can do the differential rebuild yourself! In fact, you could probably consider doing an LSD upgrade.

What Are the Benefits of an LSD Upgrade?

To better understand the benefits of a limited-slip differential, we need to understand what kinds of differentials are installed in cars.

There are cars with open differentials, like most passenger vehicles you see on the roads. These differentials send power to both wheels but allow them to turn at different speeds. This is crucial for controlled steering around corners.

Although it’s the most commonly used type of differential, it has its flaws. The biggest one is that this type of differential sends more power to the wheel with the least traction. This makes it difficult to drive the car on slippery or icy roads.

When it comes to cars with locking diffs, it’s a preferred option for off-road vehicles. While driving on a regular paved road, the locking diff behaves the same as an open diff, letting the wheels turn at a different speed when cornering, but these differentials allow the driver to lock the differential and send the same amount of power to both wheels, making them turn at the same speed as well.

This is important for off-road driving because you can experience rocks or bumps that are large enough to completely lift one side of the car, leaving one wheel hanging in mid-air. An open diff would send all the power to the wheel with no traction, leaving the car completely stranded.

Lastly, there’s the LSD. A limited-slip differential is one of the most underrated performance parts you can get for your car. Unlike an open differential, the LSD will send more power to the wheel with more grip, making the car go faster through corners. It will also reduce the possibility of understeer.

The main advantage of an LSD upgrade is more traction. More traction means better power delivery and more efficient control of the car. This is why so many performance vehicles come with a limited-slip differential. Less tire wear is also a great benefit from a BMW E36 differential rebuild with an LSD upgrade.

How to Perform a BMW E36 Differential Rebuild?

Now that you have basic knowledge about the types of differentials available, and why an LSD is a good choice, we’ll cover a step-by-step guide on how to perform a differential rebuild on your BMW E36. The parts you’ll need for a differential rebuild on a BMW E36 include:

Step 1 – Raise The Car

Assuming you don’t have a professional car lift at home, you should jack up your car and put it on axle stands. Before proceeding with the next steps, make sure your car is secure, and it’s safe to work on.

Remember, safety should be your top priority! If you suspect the car can fall off the jack stands, double-check everything and only start working on the car when it’s safe to do so.

Step 2 – Remove the Muffler and Anti-Roll Bar

When you’ve made sure the car is safe to work on, you can proceed with removing the muffler and the anti-roll bar. This will give you access to the differential with more than enough room to work.

Step 3 – Secure the Axles

BMW E36 Differential Rebuild Step 1
Also, make sure to secure the axles with a strap or zip ties, so they wouldn’t swing once disconnected from the diff. It’s not something professional mechanics insist on doing, but it will make work a lot easier.

Step 4 – Separate the Axles From The Diff

BMW E36 Differential Rebuild Step 2
This is a pretty straightforward process. The first thing you need to do is undo the bolts that attach the axles to the differential.
BMW E36 Differential Rebuild Step 3
These are E12 star-shaped bolts and are found on both sides of the differential that are facing the wheels.

Step 5 – Remove the Driveshaft Bolts

BMW E36 Differential Rebuild Step 4
Keep in mind that the differential is a very heavy part, and you’ll need some assistance in removing it safely. Most mechanics use a hydraulic jack to support the weight of the differential, as it’s much easier to get it from under the car that way.

To remove the differential from the car, you’ll need to unbolt the driveshaft from the differential. Before you do that, make sure to leave a mark on the driveshaft with the diff input shaft for easier assembling once you’ve finished the differential rebuild.

Step 6 – Lower the Diff

BMW E36 Differential Rebuild step 5
The hydraulic jack should already be placed under the differential in a way, so the differential won’t fall and break the bolts holding it to the car. Also, make sure you’ve disconnected the speed sensor before lowering the differential.

Step 7 – Drain the Diff

BMW E36 Differential Rebuild step 6
Now that you’ve freed the differential from the car, it’s time to start the differential rebuild. First things first, remove the drain plug, so you can remove all the oil from the differential.

Make sure you have a pan or something wise to gather the fluid so you won’t mess up your workspace. At first, a lot of fluid will come out, but it’s best to leave it for some time so most of the oil will drain on its own.

Step 8 – Remove the Output Shaft

BMW E36 Differential Rebuild step 7
The next step is to remove the output shaft from the diff. You can do that by placing a wrench or screwdriver between the shaft and differential. By applying some force and wedging it a little bit, or should come off pretty easily.

Step 9 – Remove the Rear Diff Cover

BMW E36 Differential Rebuild step 8
Next, you’ll need to remove the rear differential cover. This is done by unscrewing the bolts on the back of the diff that hold the cover in place.

Step 10 – Remove the Output Shaft Caps

BMW E36 Differential Rebuild step 9
The last pieces that are in the way are the output shaft caps. They are bolted to the differential, and it’s a straightforward process to remove them.

Now, you can take the differential unit out of the differential and find the part that’s failing. Anything that looks even remotely worn should be replaced.

BMW E36 Differential Rebuild step 11

Even though it’s possible to do the replacements at home, it’s advised to take the failed parts to a transmission shop where professional equipment will be used to push out bearings and replace worn-out parts with OEM parts.
E36 Differential Rebuild step 10

If your differential is limited slip (all M3s, many 325i and 328i with manual transmissions), check our separate DIY if you would like to fully rebuild or even upgrade your LSD unit.

Step 11 – Reassemble the Diff

E36 Differential Rebuild step 12
Once you have all the parts for your E36 differential rebuild, it’s a simple process to put everything back together.

E36 Differential Rebuild step 13
Just like you took out the differential unit, the reverse process is applied to put it back in. Reinstalling the output shaft caps requires only bolting them back to the diff (torqued to 10ft-lbs plus 40 degrees angle torque), but make sure you’ve placed them correctly (you should see a small tab, it points to the top of the differential). Before proceeding, you can spin the front input shaft to see if everything is running smoothly inside.

Step 12 – Install the Output Shafts

E36 Differential Rebuild step 14
Installing the output shafts should be done cautiously because you’ll probably need to wiggle them, so they’ll fall into place correctly. Under no circumstances should you try to force the output shafts in because you can cause additional damage to your newly rebuilt differential. Taking your time is essential at this point.

Once the shafts are wiggled into place, take a rubber or plastic mallet and give them a few light taps.

Step 13 – Reinstall the Rear Cover

Before reinstalling the back cover, you should place a new gasket to prevent any leaks here. The gasket is as important as any other part of the diff, so it shouldn’t be ignored even if it looks brand new. When tightening the bolts, make sure you torque the bolts at 34ft-lbs.

Returning the differential to the vehicle is the reverse process of taking it off. The important thing is to refill the differential fluid. Two quarts should be more than enough to make everything work smoothly. Using new seal washers on the drain and fill plugs is also recommended.

If you’re not afraid of a little elbow grease, you can save up a couple of hundred dollars if you do most of the rebuilding work.

Looking for parts for an E36 Differential Rebuild?

Although people are usually intimidated just by mentioning a differential rebuild, it’s not something that’s very complicated. At, we have a wide array of genuine OEM, and aftermarket BMW car parts that you’ll need if you’re planning a differential rebuild or any other work on your BMW E36.

When you visit our online store, you’ll easily find the dropdown menu where you can select the year, make, and model of your car. Within a few seconds of typing in your search query,  you’ll get a complete list of parts that are a perfect fit for your car.

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