How to use USB music playlists?

I see an option when listening to USB music that says playlists. As far as I can tell there isn't an option to make one in the i3 menus. Is the playlists feature look at iTunes and mp3 playlist files to determine what appears in the playlists menu? I'd like to use them in the car since the car doesn't have a continuously playing by folder feature. It only continuously plays what's inside the folder, not going to the next folder once the last song in the folder has been played. Pushing the play button on the menu cycles through all music but does so by file name, not folder name so that doesn't help me, thus why I was wanting to use the playlist feature.

My BRZ and all other cars I've had that supported USB mp3 audio cycle the folders and songs in the folders, so this is a little different than I'm used to.