My son enjoys family day care and has settled in nicely. He's one of four kids, so it's a quieter and more home-like environment. He gets his own room to sleep in. I don't think it's cruel for him to be there, his educator is great. In fact, it's good for him to mix with other kids of different ages for social reasons and also for development of other skills. He's the youngest there so it's kind of like having brothers and sisters! He gets the eldest/only child at home, but one of a few at family day care. I think it's good for him.
Depending on your area its likely to still work out financially positive for you to return to work. The child care rebate isn't means tested and it's 50%... My sons fees are $7ph, so after the rebate we pay $3.50 an hour - definitely still worth me working! Even when I take into account the bus fare, etc.