Former Chelsea captain Terry is a free agent having opted to leave the Premier League champions after 22 years at the club, a spell that saw him win 15 major trophies.
Championship club Villa are favourites to sign the 36-year-old, with rivals Birmingham City also in the running.
"I think both would be married up very well," former Villa boss Sherwood told Sky Sports of the prospect of a move for Terry.
"Every club needs them characters, certainly a huge cub like Villa with the fan base that they have got.
"Certainly John won't feel like he is going to a smaller club."
Sherwood was full of praise for Terry's leadership skills and feels he would have a huge impact at Villa both on and off the pitch.
"I think John's an excellent professional, not only what he will bring on the pitch but what he will bring to the dressing room," he continued.
"He will make other players around him better. They need some leaders there and certainly there are no bigger leaders than John Terry."
Terry fell out of favour at Chelsea after Antonio Conte's arrival as head coach, only making nine top-flight appearances in 2016-17.