So far it seems to be more difficult to fight with level 2 vs level 3 than with level 5 vs level 6, mainly because your possibility to improve your equipment pretty much sucks at the low level, if you don't pickpocket and/or kill every other prisoner. Second because you now have more and better skills and therefor more tactical options.
Fighting the crocodiles for example felt pretty risky for me and my friend, but when we fought the lizards later on we never felt really threatend, we fought pretty halfhearted and teleported our own heroes in front of the enemies to troll each other.
I think it is pretty impossibe to reach a state were you can't progress anymore. But it is possible to reach a state, were you just think: This is not fun anymore, I want to do something different.
