We explain the origin of voltage variations due to self-mixing in a terahertz (THz) frequency quantum cascade laser (QCL) using an extended density matrix (DM) approach. Our DM model includes a full calculation of scattering between quantum states as well as coherent transport from miniband states into the upper lasing level and allows calculation of both the current–voltage (I-V) and optical power characteristics of the QCL under optical feedback. The model is applied to an exemplar 2.6 THz bound-to continuum QCL that is typical of those used in optical feedback interferometry. Feedback from an external cavity is included in the model through a change in cavity loss, to which the gain of the active region is clamped. The variation of intra-cavity field strength necessary to achieve gain clamping, and the subsequent change in bias required to maintain a constant current density through the heterostructure is then calculated. Strong enhancement of the self-mixing voltage signal due to non-linearity of the I–V characteristics in the analyzed THz QCL device is predicted and confirmed experimentally.