Characters. Where do they come from?

Ever meet someone on the street and think; Now, there's a character. Someone to build around.

Once I was writing a story and in this work was a man, named Willy, who had been in prison, now out and trying to be a better person. He's young, toughened by life and back living with his mom. He knows what he did broke his mother's heart and he tries to keep his cool under pressure mostly for her. He made promises and he'll put up with a lot not to hurt her again.

So, I'm grocery shopping with my daughter. There behind the deli counter is Willy. Almost the perfect Willy. Even his language was Willy.

So, where do your characters come from? Are they people you know?

And what about the people in your life you don't like? Do you take their uglier traits and put them into your bad guys?

Secret; I use the first names of those nasty girls from high school for the ugly characters in my stories. Am I evil for doing this?