Originally Posted by Xan

1-way: Connects the wheels together only when you are pressing the gas. If you are off the gas they can move at different speeds.

1.5-way: Connects the wheels when you press the gas, but allows more difference in wheel speeds when you aren't pressing the gas. Hence the 1.5 way, connects when on the gas, connects partially when off. This is my personal reccomendation as it always has the wheels connected, but allows them to move more when off the gas so you can get a sharper turn in.

2-way: Connects the wheels when both on and off the gas. Some people like these but i think they create a little too much understeer. if you have a good suspension you can compensate, but you need good car control skills too to keep it under control.

(I'm lazy, so this is a copy paste)