Many people don't realize it, but there is no need to use a monospaced font in Terminal.app. The reason is that, unlike most other programs that render monospaced text (including all GUI text editors and web browsers I've tried) it enforces a monospaced character width. Therefore, if you type 12345678 in one line and abcdefgh in the next line right below it, then h will align with 8 regardless of whether the font you choose is monospaced or not.

With that being said, I still actually recommend that you do use a monospaced font, like Menlo or DejaVu Sans Mono (the latter is not included with Mac OS X, but is a font very similar to Menlo but slightly better in my opinion). The reason is that these fonts are designed to be readable despite the fact that shorter characters like i and l are just as long as longer characters like w.

If you do decide to try a non-monospaced font in Terminal.app for whatever reason, I suggest you play with the character spacing and line spacing controls in the font settings dialog. Some fonts are over spaced, and some are under spaced, and this can fix that.

[crarko adds: Just in case you feel a strong urge to experiment with fonts in Terminal, this is a reminder that you can. Even Zapf Dingbats works.]