Clearly bad game design
Sure I will just pickup the weapons I can't carry carry because I am over encumbered since I can't sell stuff I am carrying since vendor carry around like $3 and the game drop about seven million pieces of questionable crafting materials
Regardless of how I ended up here, for me the game is less of an adventure game and more of a series of life lessons on why being poor is bad. When you run out of money, you have trouble recovering since you ran out of money.
You'll get through this, man, don't worry.
Step 1. Drop some of your items at a fast travel sign. These will likely stay, but to be safe, drop what you can afford to lose.
Step 2. Find a better vendor. Ride around. Use a map out of game. Do what you have to do.
Step 3. Repair your stuff. Go back to where you dropped your goods previously.
Step 4. Profit!
Also, do a main quest, you'll get exp quick and won't have to be worried about being underleveled anymore.
Anyway, try playing a Witcher, not a traveling junk collector.