In KoA it seems like the most cost-effective method for repairing items is to wait until their condition reaches 0 and then use repair kits. Are there any drawbacks to this? For example, is the item less effective as it gets more damaged? Is it possible for items to be damaged beyond repair?
In my experience, the cost-optimal solution (when your Blacksmithing is high enough to repair your items with one kit) is to wait until they hit 0 durability remaining.
There is a warning when your items are almost broken, but I never really saw a significant difference in their performance at this stage. I'd routinely finish the fight I was in the middle of if I got this warning. The only difference I noticed is when they are completely broken. Sometimes in the heat of battle I'd miss the damaged/broken warnings, and notice that my weapons were doing almost no damage.
Due to the fact that equipment effectiveness is almost completely negated when items are at 0 durability, I never spent enough time in that state to gauge if it is possible to lose them completely. However, I seriously doubt this is possible. I believe the only drawback to being at 0 durability is the item being nearly useless.
I qualified my answer as being "cost-optimal" because this has practical implications. Once the durability of one piece of armor is critically low, it's likely that multiple pieces of equipment require repair. In practice, I tended to repair everything below a certain threshold once one of my items broke - this way, I didn't have to go into and out of the menu as frequently. Also, this kept me from situations where much of my armor failed at once, leaving me defenseless. Money tended to be less valuable than my time - either time spent paging through the menus or time spent loading if I lost due to equipment failure.
In my experience, I've found that there is no difference in performance until I'm warned that my stuff is almost broken, at which point I switch to a backup weapon/armor until I get out of the dungeon I'm in.
However, I have found myself in a pattern of questing until my inventory is full, then warping to a safe zone (Didenhill Crafter's Boutique, usually), fixing my broken stuff, salvaging the bits I like, ditching the bits I don't and then evaluating my weapons, armor and potion needs. Then I hit the healer (if needed) on the way out and then I'm back on the road again.
It costs a bit more to keep you goodies at full marks but you just can't beat that peace of mind that your stuff won't give out mid-dungeon.