Is there a built-in way to create npc's or do I have to make custom npc's.
Pixie's combat library may have it (and/or Pixie's combat library may now be built into the recent quest engine/software now), but I'm not sure. We (mostly Pixie, actually) have been creating a lot more built-in features over the past few years now... but there's still a lot of rpg type of features missing, leaving you to design your own such features, as it's really hard to design a dynamic feature/system, that can be easy implemented for whatever the person wants to do within their own individual game designs.
Are you making a combat style game, or are you just asking about how to make characters in general?
You make them the same way you do objects, but than change "type" to character. You can then add in unique dialogue trees, "ask about" "tell about" and/or verbs. I personally think unique and dynamic npcs add a lot to a game... but if it's a straight hack in slash, maybe it is less important?