Probably my favorite Oblivion chraracter so far is Kyla. She's a Dunmer fighter (see my sig for a screenshot).
She started out as most of my characters start out - as just a bare outline. In her case it was "female dunmer, claymore." I was leaning a bit toward putting her in heavy armor, but even that wasn't really decided when I started playing her. And nothing else was. As I do with all my characters, I worked out the details of who and what she is as I was playing her - as I got to know her.
She came to the IC to fight in the Arena. She grew up sort of aimlessly, in a formerly wealthy family fallen on hard times. She has an older brother whom she admired and emulated as she was growing up - he's a bitter and violent killer, and another of my characters. But where he simply indulged his lust for violence, she set about learning how to fight. She always had a streak of nobility and honor that she didn't even really suspect was there, and that led her away from violence for its own sake and toward the art of combat. And, eventually, to the IC.
An odd thing happened when she started fighting in the Arena though. She was extraordinarily good at it, and she didn't enjoy it at all. She just slaughtered her opponents, and she could never get past the thought that they were just like her - people who had grown up wanting to master the art of combat - people who had invested a great deal of time and effort and dedication into learning their skills - people who genuinely cared about what they were doing. And she left them bloody heaps in the dirt. It just didn't seem right to her, and she gave it up. While she was in the IC though, she had done a few minor quests for people here and there, and she had really enjoyed that. There was something about just helping people out that appealed to her. So she set out around Cyrodiil, looking for people in trouble and helping them however she could.
Along the way, she found herself in Bruma, and immediately fell in love with the mountains and the town, and she's now in semi-retirement in the house there.
Now - for the benefit of the OP - this is how that whole story (and that's just the barest outline of it all) actually came about =
create the character. Put her in iron armor. yeah... that looks good. heavy armor then, I guess. go to chorrol, drop off the Amulet. ummm... no. Not gonna do the main quest. so..... hey! let's try the Arena! She.... let's see.... she's trained since she was young and has always wanted to fight in the Arena. yeah - that works. okay... fight in the Arena.... fight in the Arena.... sheesh. this is lame. she's just tearing these poor saps apart. I'm bored. Um..... so she doesn't want to fight in the arena any more. So...... she feels sorry for the people she's killing? Yeah! hey! that ties in - she grew up training in combat because she comes from nobility, and that was the same reason she wanted to fight in the Arena, and it's also the reason that she ends up feeling sorry for the people she's killing. She's got too much honor and decency to just be a killer! I like that. Okay.... so... if she doesn't fight in the Arena, then..... I guess she'll go do side quests..... and that'll be because..... she's decent and honorable and she wants to help people! yeah - that all fits together.
All you have to do is look for reasons for the character to make whatever decisions s/he makes. You don't really have to plan things out (and I honestly believe that planning things out is the wrong approach, though it admittedly does seem to work for some people). There just has to be some reasons for whatever the character does, and once you establish those reasons, then that gives you a framework on which to build. Over time, the character will come to be more and more distinct, and it'll become easier to figure out what they'd do and have it make sense.
Or something like that.......