Banos is a great place to unwind for a few days. The scenery is gorgeous, the slightly lower altitude allows you to finally breathe easy and provides slightly warmer temps, and of course, there are the famous thermal baths.
In town, there is the Piscina el Virgen baths. These are more easily reached and thus more popular. There is a waterfall that runs into the showers (ice-cold), and the big pool is pretty hot. But you haven't experienced hot until you visit El Salado a little bit out of town. Take a bus from Banos for $0.20 and it should be the last stop. El Salado has five pools, one a normal chlorine swimming pool, one a kid’s pool, one a large swimming pool size and quite warm, and then two amazingly steamy, hot small pools. Admission to both El Virgen and El Salado is $1, and you can stay as long as you'd like. If you go early, you will share the baths almost entirely with Ecuadorian tourists. It makes for good people-watching.
I recommend getting a massage in Banos as well. It's a bit of a splurge, but probably significantly cheaper than in your hometown. Stay in Touch charges $20/hour with a choice between two masseurs. I chose Edith, who was wonderful. She speaks English.
When you're done relaxing (or want to work yourself up before a soak in the pools), there are many lovely hikes to choose from around Banos. I did the most obvious one, Bellavista. The path starts just south of town and is easy to find. It's a popular hike with locals as well, so you might see hordes of children who came here after school. It's steep in parts, with a gorgeous view of the town from the top. There are many friendly locals along the way, and a cafe at the top to rest in.
Another fun diversion is watching the making of melocha candy. This toffee is stretched out in doorways throughout Banos (but most shops are near the bus station) and then formed into various shapes and designs. Watching people throw it over a large nail in the doorway, stretch it out, and loop it over again is pretty entertaining. There is one particular stall where one employee is happy to give out free samples. It tastes even better fresh and soft. If you can recognize him from the photo, go there! He'll give you a deal when you buy as well, and was happy to pose for a photo.
Banos is chockfull of tourists. Thus, it's not cheap. All the Internet cafés have agreed to charge $2 per hour (as opposed to $0.60 in Quito), so it doesn't really matter which one you hit. Food tends to be a bit pricier as well. And while there's competition among hotels, they don't need to bargain with you, because there are plenty of other tourists coming in. But for a few days, it's a really pleasant place to be.