The game very well creates the atmosphere of fear you are aiming for. Combat could be a bit more versatile, with different attacks/skills to use. The difficulty of the combat was fine for me: In theory I should be able to kill a rat without taking any damage, but in practice I only managed to kill 4-5 Rats in my best run. I did not find a way to heal (I see in the screenshots that there are potions, but I did not find any), that limited my ability to kill all the rats...
Things you might consider:
- Slowly heal over time (When I went outside and found a dungeon, I was still bruised from the dungeon in the town so that I did not come far.)
- Let the rats drop some loot (like healing potions, gold, etc.)
- Add something to find when outside of the town: Healing Herbs, etc.
- Let the NPCs wander around