diff --git a/src/loader.ts b/src/loader.ts
index c8453b3..4cb70a7 100644
--- a/src/loader.ts
+++ b/src/loader.ts
@@ -15,6 +15,8 @@ import type { LoaderOptions } from './types.js';
 
 const tsconfigCache = new Map<string, TsConfigResult>();
 
+const tsExtensionsPattern = /\.(?:[cm]?ts|[tj]sx)$/;
+
 async function ESBuildLoader(
 	this: webpack.loader.LoaderContext<LoaderOptions>,
 	source: string,
@@ -35,20 +37,25 @@ async function ESBuildLoader(
 		);
 		return;
 	}
-
 	const transform = implementation?.transform ?? defaultEsbuildTransform;
 
+	const { resourcePath } = this;
 	const transformOptions = {
 		...esbuildTransformOptions,
 		target: options.target ?? 'es2015',
 		loader: options.loader ?? 'default',
 		sourcemap: this.sourceMap,
-		sourcefile: this.resourcePath,
+		sourcefile: resourcePath,
 	};
 
-	if (!('tsconfigRaw' in transformOptions)) {
-		const { resourcePath } = this;
+	const isDependency = resourcePath.includes(`${path.sep}node_modules${path.sep}`);
+	if (
+		!('tsconfigRaw' in transformOptions)
 
+		// If file is local project, always try to apply tsconfig.json (e.g. allowJs)
+		// If file is dependency, only apply tsconfig.json if .ts
+		&& (!isDependency || tsExtensionsPattern.test(resourcePath))
+	) {
 		/**
 		 * If a tsconfig.json path is specified, force apply it
 		 * Same way a provided tsconfigRaw is applied regardless
@@ -56,7 +63,7 @@ async function ESBuildLoader(
 		 *
 		 * However in this case, we also warn if it doesn't match
 		 */
-		if (tsconfigPath) {
+		if (!isDependency && tsconfigPath) {
 			const tsconfigFullPath = path.resolve(tsconfigPath);
 			const cacheKey = `esbuild-loader:${tsconfigFullPath}`;
 			let tsconfig = tsconfigCache.get(cacheKey);
@@ -73,7 +80,7 @@ async function ESBuildLoader(
 
 			if (!matches) {
 				this.emitWarning(
-					new Error(`[esbuild-loader] The specified tsconfig at "${tsconfigFullPath}" was applied to the file "${resourcePath}" but does not match its "include" patterns`),
+					new Error(`esbuild-loader] The specified tsconfig at "${tsconfigFullPath}" was applied to the file "${resourcePath}" but does not match its "include" patterns`),
 				);
 			}
 
@@ -81,8 +88,22 @@ async function ESBuildLoader(
 		} else {
 			/* Detect tsconfig file */
 
-			// Webpack shouldn't be loading the same path multiple times so doesn't need to be cached
-			const tsconfig = getTsconfig(resourcePath, 'tsconfig.json', tsconfigCache);
+			let tsconfig;
+
+			try {
+				// Webpack shouldn't be loading the same path multiple times so doesn't need to be cached
+				tsconfig = getTsconfig(resourcePath, 'tsconfig.json', tsconfigCache);
+			} catch (error) {
+				if (error instanceof Error) {
+					const tsconfigError = new Error(`[esbuild-loader] Error parsing tsconfig.json:\n${error.message}`);
+					if (isDependency) {
+						this.emitWarning(tsconfigError);
+					} else {
+						return done(tsconfigError);
+					}
+				}
+			}
+
 			if (tsconfig) {
 				const fileMatcher = createFilesMatcher(tsconfig);
 				transformOptions.tsconfigRaw = fileMatcher(resourcePath) as TransformOptions['tsconfigRaw'];
diff --git a/tests/specs/tsconfig.ts b/tests/specs/tsconfig.ts
index 57e6a28..f0b0b63 100644
--- a/tests/specs/tsconfig.ts
+++ b/tests/specs/tsconfig.ts
@@ -262,6 +262,184 @@ export default testSuite(({ describe }) => {
 				const code2 = await fixture.readFile('dist/index2.js', 'utf8');
 				expect(code2).toMatch('__publicField(this, "foo", 100);');
 			});
+
+			test('fails on invalid tsconfig.json', async () => {
+				await using fixture = await createFixture({
+					'tsconfig.json': tsconfigJson({
+						extends: 'unresolvable-dep',
+					}),
+					src: {
+						'index.ts': `
+						console.log('Hello, world!' as numer);
+						`,
+					},
+					'webpack.config.js': `
+					module.exports = {
+						mode: 'production',
+
+						optimization: {
+							minimize: false,
+						},
+
+						resolveLoader: {
+							alias: {
+								'esbuild-loader': ${JSON.stringify(esbuildLoader)},
+							},
+						},
+
+						resolve: {
+							extensions: ['.ts', '.js'],
+						},
+
+						module: {
+							rules: [
+								{
+									test: /.[tj]sx?$/,
+									loader: 'esbuild-loader',
+									options: {
+										target: 'es2015',
+									}
+								}
+							],
+						},
+
+						entry: {
+							index: './src/index.ts',
+						},
+					};
+					`,
+				});
+
+				const { stdout, exitCode } = await execa(webpackCli, {
+					cwd: fixture.path,
+					reject: false,
+				});
+
+				expect(stdout).toMatch('Error parsing tsconfig.json:\nFile \'unresolvable-dep\' not found.');
+				expect(exitCode).toBe(1);
+			});
+
+			test('ignores invalid tsconfig.json in JS dependencies', async () => {
+				await using fixture = await createFixture({
+					'node_modules/fake-lib': {
+						'package.json': JSON.stringify({
+							name: 'fake-lib',
+						}),
+						'tsconfig.json': tsconfigJson({
+							extends: 'unresolvable-dep',
+						}),
+						'index.js': 'export function testFn() { return "Hi!" }',
+					},
+					'src/index.ts': `
+					import { testFn } from "fake-lib";
+					testFn();
+					`,
+					'webpack.config.js': `
+					module.exports = {
+						mode: 'production',
+
+						optimization: {
+							minimize: false,
+						},
+
+						resolveLoader: {
+							alias: {
+								'esbuild-loader': ${JSON.stringify(esbuildLoader)},
+							},
+						},
+
+						resolve: {
+							extensions: ['.ts', '.js'],
+						},
+
+						module: {
+							rules: [
+								{
+									test: /.[tj]sx?$/,
+									loader: 'esbuild-loader',
+									options: {
+										target: 'es2015',
+									}
+								}
+							],
+						},
+
+						entry: {
+							index: './src/index.ts',
+						},
+					};
+					`,
+				});
+
+				const { stdout, exitCode } = await execa(webpackCli, {
+					cwd: fixture.path,
+				});
+
+				expect(stdout).not.toMatch('Error parsing tsconfig.json');
+				expect(exitCode).toBe(0);
+			});
+
+			test('warns on invalid tsconfig.json in TS dependencies', async () => {
+				await using fixture = await createFixture({
+					'node_modules/fake-lib': {
+						'package.json': JSON.stringify({
+							name: 'fake-lib',
+						}),
+						'tsconfig.json': tsconfigJson({
+							extends: 'unresolvable-dep',
+						}),
+						'index.ts': 'export function testFn(): string { return "Hi!" }',
+					},
+					'src/index.ts': `
+					import { testFn } from "fake-lib";
+					testFn();
+					`,
+					'webpack.config.js': `
+					module.exports = {
+						mode: 'production',
+
+						optimization: {
+							minimize: false,
+						},
+
+						resolveLoader: {
+							alias: {
+								'esbuild-loader': ${JSON.stringify(esbuildLoader)},
+							},
+						},
+
+						resolve: {
+							extensions: ['.ts', '.js'],
+						},
+
+						module: {
+							rules: [
+								{
+									test: /.[tj]sx?$/,
+									loader: 'esbuild-loader',
+									options: {
+										target: 'es2015',
+									}
+								}
+							],
+						},
+
+						entry: {
+							index: './src/index.ts',
+						},
+					};
+					`,
+				});
+
+				const { stdout, exitCode } = await execa(webpackCli, {
+					cwd: fixture.path,
+				});
+
+				expect(stdout).toMatch('Error parsing tsconfig.json:\nFile \'unresolvable-dep\' not found.');
+
+				// Warning so doesn't fail
+				expect(exitCode).toBe(0);
+			});
 		});
 
 		describe('plugin', ({ test }) => {