Casa Teresa, a quiet pension, in a house in the suburbs of Colonia, was our base for our three night stay in Colonia. It cost 18 USD a night and for that we had a room with shower and bathroom as well as a TV and even a third small room. Luxurious to us after two weeks of cramped hostels in Buenos Aires.
Casa Teresa was about 9 blocks from the centre of Colonia and another 5 blocks to the old town, but this wasn´t too much of a problem for us as Colonia is very safe and you could walk along the quiet, suburban streets at any time. We also had the use of a kitchen and free (though very slow) Internet access. Overall, I would recommend Casa Teresa, especially if you are on a budget, though it is very quiet and you might not meet any other travellers at all.
Colonia has many unique and cheap hotels that have vacancy nearly all the time. The visitors center is located two blocks from the bus / ferry station and from the visitors center you can recieve a map with all the hotels marked on it just take your pick.
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