Can anyone recommend a good place to overnight on the trip between Marbella and Madrid? We don't want to drive straight through, so we though we could see another nice town on the way.

Cordoba, Baeza/Ubeda?

It's not halfway, but if you haven't seen Granada, I can't imagine passing it by.

Sevilla, the city of Carmen, Don Juan and Figaro, is the "queen of Andalucía". You should nevertheless spend more than a stopover here. Perhaps consider taking a day or two off Marbella?
http://www.andalucia.com/cities/sevilla.htm

Talking about the queen of Andalucía (and not taking herself too seriously), a night out at Casa Anselma might give you a taste: http://www.youtube.com/watch?v=Gw1atBQq_u0

Almagro is 400km from Marbella, 220 from Madrid, 30 km. off your route. It is a small town easy to negotiate, and very charming. Jaen may be another option, nearer to Marbella, but a big city you won't visit in little time. There are other places I could recommend along your route but with less touristic interest.