1 the tank is to big and will have the heater always trying to catch up.
2 the tank is the right size and the heater will keep the tank at correct temp
3 the tank is small and the heater will have to hardly stay on to heat tank.
regardless of the size of tank as long as heater works correctly it will heat tank to the desired level and shut off. Not boil the tank. IMHO with heaters and filters overkill is better less stress on the component to do its job so will last longer.
The other side of that advice is that bigger heaters, when they do fail, will overheat the water very badly. "Too small" heaters can fail, but will not be able to raise the water temperature high enough to do major damage. I have never read about a Hydor in-line heater failing in the "on" position, so you will probably be ok using one.
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