First off, the Fandango is a dance
the fact that souls are trapped in the 8th underworld untill they pay their dept means that they are 'forced to dance this grim fandango...' as olivia would say
get to the blue casket and make olivia do a poem...eventually she will say something along the lines off..
Grim Fandango
With bony hands I hold my partner,
on soulless feet we cross the floor.
The music stops as if to answer,
an empty knocking at the door.
It seems his skin was sweet as mango,
when last I held him to my breast.
But now we dance this grim fandango,
and will four years before we rest.
Olivia Ofrenda
so grim fandango basically means sad dance/journey
go here -->
http://mausoleum.grimfandango2.com/poetry/) for info on the poetry in GF