If I remember correctly, With wrong grade weapon your attack speed goes into the sewer. With wrong grade armor your run speed goes into the sewer, and maybe pdef not sure.
I think you also do not get any of the armor bonuses or the weapon SA bonus either.
With weapons, spells fail and accuracy -20. With armor, Crit rate, Run spd, atk spd, cast spd, go down depending on how much equipment you have out of your grade expertise.
It used to be so, but since you can't drop anything anymore, unless you are Red and have +5 PKs, you only get the accuracy and decreased speed deficits.